UK: Ceasing To Be A Subsidiary

Last Updated: 28 May 2010
Article by Timothy Parsons

In Enviroco Ltd v Farstad Supply A/S [2009] EWCA Civ 1399, the Court of Appeal concluded that, in certain circumstances, a company which is a subsidiary of a holding company may cease to be a subsidiary following the grant of security over shares in the subsidiary by its holding company to a bank.

The result may seem surprising at first and may cause lenders to be concerned about the risk of the company whose shares are charged becoming a subsidiary of the secured lender. The decision is, however, applicable only to a limited range of circumstances and, as explained below, there should not be a risk for the lender in most situations.

The case concerned the vessel M.V. Far Service which was chartered by Farstad to Asco UK Limited, a subsidiary of ASCO plc. Enviroco was engaged to clean the vessel including its oil tanks. During the operation, oil from the tanks caught fire, resulting in the death of an Enviroco employee and damage to the vessel.

Farstad sued Enviroco. However, Enviroco claimed it was an "affiliate" of Asco UK, by virtue of also being a subsidiary of ASCO plc, and that it was therefore entitled to the benefit of an indemnity from Enviroco in respect of its liability. This indemnity was contained in the charter of the vessel and was expressed to be in favour of Asco UK and its "affiliates".

In the period prior to the incident giving rise to the claim, ASCO plc had entered into a Scottish law "Deed of Pledge" in favour of the Bank of Scotland (the "Bank") in respect of its shares in Enviroco. This document had a similar effect to an English law legal mortgage of the shares (shares being intangible assets incapable of being "pledged" under English law). Pursuant to this security, the Bank had become registered as the holder of the relevant shares.

Prior to the grant of security, it was clear that Enviroco was a subsidiary of ASCO plc since, although it held only a minority of the shares in Enviroco, ASCO plc was also able to control, pursuant to an agreement with another shareholder, the majority of the voting rights in Enviroco in accordance with section 736(1)(c) of the Companies Act 1985 (now section 1159(1)(c) of the Companies Act 2006). The other tests of a "subsidiary" were inapplicable since ASCO plc did not alone hold the majority of voting rights in Enviroco (paragraph (1)(a)), nor did it have the ability to appoint a majority of the directors of Enviroco (paragraph (1)(b)).

The terms of the security were such that, as is usually the case in such situations, the voting rights attaching to them were to be exercised, prior to any default under ASCO plc's banking arrangements, by ASCO plc as proxy for the Bank provided that such exercise did not adversely affect the value of the Bank's security or result in the shares becoming registered in the name of another party.

Section 736A(7) of the Companies Act 1985 (now paragraph 7 of Schedule 6 to the Companies Act 2006) had the effect of treating the voting rights attached to the shares subject to the security as being held by the person providing the security, namely ASCO plc. In order for Enviroco to remain a subsidiary, however, both elements of section 736(1)(c) needed to be satisfied. The deeming provision of section 736(A)(7) (together with the shareholders' agreement in respect of shares in Enviroco) meant that the requirement as to voting rights was satisfied. Was ASCO plc, however, still a "member" of Enviroco once the Bank had been registered as holder of the relevant shares?

At first instance, Gabriel Moss QC sitting as a deputy judge, held that, in the context of the importation of section 736 and section 736A into the charter relating to the vessel, the "rights attached to shares" referred to in section 736A(7) included the right to be registered as a member. The operation of section 736A(7) would therefore also deem ASCO plc to be a "member" of Enviroco even after the Bank had been registered as shareholder by virtue of its security.

The Court of Appeal (Mummery, Longmore and Patten LJJ) disagreed and, in the course of a detailed analysis of the process by which both section 736 and section 736A had been introduced into the Companies Acts, Patten LJ concluded that the "rights attached to shares" referred to in section 736A can only refer to the "rights" detailed in section 736. These "rights" are voting rights in a company and the right to appoint or remove members of a company's board of directors.

The conclusion, therefore, was that Enviroco had ceased to be a subsidiary of ASCO plc upon registration of the Bank as holder of the shares in Enviroco. Enviroco had, therefore, ceased to be an "affiliate" of Asco UK and could not benefit from the indemnity given by Farstad.

Is this result of concern to lenders and borrowers? It is, but only in limited circumstances. At least under English law, it is more common for a lender to take security over shares by way of equitable mortgage or charge. In such a case, the lender will take possession of share certificates and signed stock transfer forms. It will not become registered as shareholder unless there is a default and the lender seeks to enforce its security. The borrower granting the security will, therefore, still be a "member" and that, together with the operation of section 736A(7) (now Schedule 6, paragraph 7) will mean that the holding company/subsidiary relationship will not have been broken.

In the case of a majority or wholly owned subsidiary (assuming the holding company holds the majority of voting rights itself), even the grant of a legal mortgage will not break the holding company/subsidiary relationship since paragraph 1(a) of section 736 (now section 1159(1)(a)) will still be satisfied where, as will usually be the case, the voting rights effectively remain with the holding company as proxy or nominee for the lender.

It is also worth noting that, even in the particular circumstances of this case, there was no suggestion that the Bank would have become the holding company of Enviroco, thus rendering Enviroco a subsidiary of the Bank. The deeming provisions of section 736A(7) would mean that a lender could not satisfy any of the tests in section 736(1) unless, for example, the terms of the security were such as to give a lender completely unfettered control of the exercise of voting rights in respect of the majority of shares in the company in question.

One aspect of this decision that should be considered by lenders and other contracting parties is the possibility that taking security by way of legal mortgage over shares in circumstances similar to this case may result in the company in question ceasing to be one of the companies in a "group" for the purposes of testing covenants, warranties and undertakings in an agreement. Attention to drafting of the definition of "group" and/or "subsidiary" in loan agreements and other documents may therefore be required.

The matter is not finally settled. The Supreme Court has recently granted to Enviroco leave to appeal, with the matter expected to be heard in the autumn.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.