Farstad Supply A/S (Respondent) v Enviroco Limited (Appellant), [2011] UKSC 16, 06/04/2011

Fri, 15 Apr 2011 00:21:33 GMT

Farstad Supply A/S owned a vessel called the “Far Service”. On 4 February 1994, Aberdeen Service Company (North Sea) Ltd (“Asco UK Ltd”) chartered the Far Service from Farstad. Asco UK Ltd is a wholly owned subsidiary of ASCO plc, a major oil and gas logistics company registered in Scotland. They wished to use the Far Service to supply and service offshore installations.

Enviroco Ltd cleans ships on an industrial scale among other things and is also registered in Scotland. Until 1999 it too, like Asco UK Ltd, was a wholly owned subsidiary of ASCO plc. In November 1999, in connection with a joint venture with Stoneyhill Waste Management Ltd, Enviroco’s shares were converted into equal numbers of A and B ordinary shares. ASCO plc held the A Shares whereas Stoneyhill held the B Shares.

By their 1994 contract, known as a “charterparty”, both Farstad and Asco UK Ltd agreed to indemnify and hold each other harmless in relation to certain liabilities. Importantly, Farstad further agreed to indemnify Asco UK Ltd’s “Affiliates”, who were defined by reference to the meaning of “subsidiary” in section 736 of the Companies Act 1985, including any amendments.

On 7 July 2002, Enviroco was employed to clean the oil tanks of the Far Service. While the tanks were being cleaned, a fire occurred causing the death of one of Enviroco’s employees and substantial damage to the Far Service.

Farstad, the owner of the Far Service, brought a claim in Scotland against Enviroco for losses it allegedly suffered as a consequence of the fire. Farstad claimed approximately £2.7 million. Enviroco sought to rely on the indemnity clauses in the 1994 charterparty on the basis that it was an “Affiliate” of Asco UK Ltd because each of them was a subsidiary of ASCO plc.

Prior to the fire, ASCO plc had entered into a “Deed of Pledge” with the Bank of Scotland in order to secure some of its obligations. By a Scottish share pledge, ASCO plc gave the Bank of Scotland security over the A ordinary shares held by it in Enviroco by re-registering the shares in the name of the bank’s nominee company.

Whether or not Enviroco could rely on the indemnity depended on whether the fact that the shares in Enviroco were registered in the nominee’s name meant that Enviroco was not a subsidiary of ASCO plc at the time of the fire and therefore not an “Affiliate” for the purposes of the 1994 charterparty. Whether or not Enviroco was a subsidiary of ASCO plc in turn depended on whether ASCO plc was “a member” of Enviroco at the relevant time.

The Court of Appeal decided that because the shares were registered in the name of the bank’s nominee company at the time of the fire, ASCO plc was not a member of Enviroco. Thus Enviroco was not a subsidiary of ASCO plc so it could not rely upon the indemnity clauses.

The Supreme Court unanimously dismisses Enviroco’s appeal and holds that Enviroco was not a subsidiary because ASCO plc was not “a member” of Enviroco. Lord Collins gives the main judgment. Lord Hope and Lord Rodger give shorter judgments elucidating the position in Scots law.

The legislation makes clear that “a member” of a company is the person on the register. Where it is necessary to apply the legislation to persons who are not on the register, special provisions are made. ASCO plc turned Enviroco into a joint venture company and then charged the shares to a Scottish bank by following the necessary Scots law procedure. However, to find in Enviroco’s favour would have required the Court to engage in an impermissible form of judicial legislation.

In Re Sigma Finance Corporation (in administrative receivership) and In Re The Insolvency Act 1986 (Conjoined Appeals), [2009] UKSC 2

Wed, 25 Nov 2009 12:31:13 GMT

Sigma is a structured investment vehicle, whose business involved acquiring asset-backed securities and other instruments, using funds raised by issuing or guaranteeing US dollar and Euro medium term notes (MTNs) as well as liquidity from other sources, such as facilities, derivatives, repurchase contracts and capital notes. All of Sigma’s assets were secured in favour of its secured creditors upon the terms of a Security Trust Deed (STD) made between Sigma and Deutsche Trustee Company Limited.

The financial crisis affected the value and liquidity of Sigma’s assets and ultimately one of Sigma’s liquidity providers gave notice of an event of default under its facility agreement. In consequence, a floating charge created under cl.4.1 of the STD crystallised and the liquidity facility was cancelled. The Security Trustee appointed Receivers.

Following realisation of its remaining portfolio in December 2008, Sigma’s assets consisted of cash of no more than around US$450m. Sigma’s unpaid secured liabilities were estimated to total around US$6.2bn.

The issue on these appeals was how Sigma’s remaining assets were to be distributed. Sales J and, by a majority, the Court of Appeal held that the assets were to be distributed according to the dates when the relevant debts became due.

The Supreme Court (by a majority of 4:1) allowed the appeals holding that, on interpreting the relevant clause in the STD in context, the conclusion that the Receivers were not obliged to give priority to the first maturing Short Term Liabilities was consistent with the wording of the clause in the context of the STD as a whole and with the commercial purpose of the instrument.

Commercial

Farstad Supply A/S (Respondent) v Enviroco Limited (Appellant), [2011] UKSC 16, 06/04/2011

In Re Sigma Finance Corporation (in administrative receivership) and In Re The Insolvency Act 1986 (Conjoined Appeals), [2009] UKSC 2