You may recall our previous e-update Enviroco v Farstad Supply - "Court of Appeal ruling on the meaning of "Subsidiary" in which we noted that Enviroco had sought leave to appeal the decision of the Court of Appeal. The appeal has now been heard and a judgement in relation to the appeal has now been issued by the Supreme Court.
Background to the appeal
The decision of the Court of Appeal raised some interesting questions in relation to the interpretation of what constitutes a holding company and subsidiary for the purposes of the Companies Act 1985 (the "1985 Act") in relation to transactions involving a Scots law pledge of shares.
The holding company of Enviroco had entered into a Deed of Pledge in respect of its shares in Enviroco in favour of Bank of Scotland plc. Throughout the term in which the share pledge was in force, the bank's nominee company was listed on the register of members, but the holding company effectively retained the voting rights of a member.
The decision of the Court of Appeal was that, where a Scots Law share pledge has been entered into by a company who was a holding company by virtue of s.736(1)(b) or (c) of the 1985 Act, then the pledgor ceases to be a member of the company for the purposes of s.736 of the 1985 Act.
Basis of the Appeal
Enviroco claimed that the version of section 736 of the 1985 Act introduced by the Companies Act 1989 (the "1989 Act") was intended to bring the definition of "holding company" and "subsidiary" into line with the new definitions of parent undertaking and subsidiary undertaking set out elsewhere in the act. They argued that it cannot have been the intention of Parliament, in enacting a new and stricter definition of holding company and subsidiary, to enable easy evasion of the statutory restrictions imposed on holding and subsidiary companies by the use of nominees.
Enviroco then developed their argument further. Firstly, that in terms of section 736(1)(c) of the 1985 Act, the reference to "member" does not require any putative parent company to be named in the subsidiary's register of members. Secondly, that the attribution provisions contained in sections 736A(6) and (7) attribute to the putative holding company the membership rights enjoyed by a nominee for the holding company or by a chargee holding shares charged by the putative holding company, so that it is the holding company which has those rights and is thereby the member for the purposes of section 736.
Judgement
The Supreme Court held that in order to find in Enviroco's favour, it would have been required to engage in "an impermissible form of judicial legislation". The position in Scots law is simply and clearly that a "member" of a company is the person or corporate body listed on that company's register members.
It should be noted that the Supreme Court acknowledged that this outcome was "clearly odd" and "possibly absurd", but that the position was well settled and the court was not the correct forum in which to amend the legislation.
It should also be remembered that the Enviroco decision does not affect companies who have a holding company / subsidiary relationship by virtue of s.736(1)(a) of the 1985 Act, which would include the majority of group company relationships.
As noted in our previous e-update, the substance of the relevant sections of the 1985 Act is reproduced in the Companies Act 2006 (the "2006 Act") and so the effect of this decision will apply equally to the 2006 Act.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
