The Supreme Court handed down its judgment in the case of Enviroco Ltd v Farstad Supply A/S [2011] UKSC 16 on 6 April 2011. This case concerned the construction of a charterparty and the issue between the parties was whether one of them was an “affiliate” of the charterer for the purposes of provisions in a charterparty by which both the owner and the charterer agree to indemnify and hold each other harmless in relation to certain liabilities.

The charterparty had been entered into on 4 February 1994 between Farstad Supply A/S (“the respondent”), the owner of a vessel called the “Far Service”, and Aberdeen Service Company (North Sea) Ltd (“ASCO UK”), a wholly owned subsidiary of ASCO plc (“ASCO”), a major oil and gas logistics company registered in Scotland, who wished to use the Far Service to supply and service offshore installations. The charter was for 5 years, with an option to extend for up to a further 5 years. The charterparty served to allocate risk and responsibility in relation to certain liabilities, in particular the respondent agreed to indemnify ASCO UK’s “affiliates” in respect of any loss or damage to the Far Service or to other property of the respondent, affiliates being defined by reference to the meaning of “subsidiary” in section 736 of the Companies Act 1985 (“the Act”).

A third company, Enviroco Ltd (“the appellant”), carried on business (inter alia) in the industrial cleaning of ships and until 1999 it was also a wholly owned subsidiary of ASCO. In November 1999, in connection with a joint venture with Stoneyhill Waste Management Ltd (“Stoneyhill”), the appellant’s shares were converted into equal numbers of A and B ordinary shares, with ASCO retaining the A shares and Stoneyhill the B Shares. In May 2000, ASCO had executed a Deed of Pledge, governed by Scots law in favour of a nominee company of the Bank of Scotland (“the Bank”) in order to secure facilities granted by a number of banks. By that deed, ASCO pledged, charged and assigned to the Bank the A ordinary shares held by it in the appellant, and agreed to register those shares in the name of the Bank.

On 7 July 2002, the appellant was employed to clean the oil tanks of the Far Service. While the tanks were being cleaned, a fire occurred causing substantial damage to the vessel and the death of an Enviroco employee.

On 26 March 2007 the respondent issued proceedings in Scotland claiming damages from the appellant amounting to approximately £2.7 million for losses suffered as a consequence of the fire. The appellant sought to rely on the mutual exception and indemnity clauses in the charterparty on the basis that it was an “affiliate” of ASCO UK because each of them was a subsidiary of ASCO. It also issued proceedings in England, seeking a declaration that it was an affiliate of ASCO on the true and proper construction of the indemnity clause. The respondent submitted that ASCO was not a “member” of the appellant within the meaning of section 736(1)(c) and had not been a member from the time that the shares in the appellant had been registered in the name of the nominee.

The Court of Appeal had previously allowed an appeal by the respondent, holding that in accordance with Scottish practice, because the shares in the appellant were registered in the name of the Bank at the time of the fire, the appellant was not a subsidiary of ASCO and therefore not an 'affiliate' for the purposes of the charterparty.

The appellant for its part submitted that the reference to “member” in section 736(1)(c) did not require the parent company to be named in the subsidiary's register of members since the section applied to all forms of body corporate, whether or not they had any register of members, and so the use of the word “member” could not have been intended to require entry on a register of members. Instead, the reference to “member” referred to the holding of rights of membership. It made reference to section 258 of the Act to the effect that for accounting purposes, an undertaking was to be treated as a member of another undertaking if shares in the latter were held on its behalf. Furthermore, section 736A(6) provided that “rights held” by a person as nominee for another “shall be treated as held by the other”, and section 736A(7) provided that “rights attached to shares held by way of security shall be treated as held by the person providing the security”, although neither of those provisions mentioned membership.

Lord Collins, delivering the leading judgment of the Supreme Court held that the appellant was not a subsidiary because ASCO was not “a member” of that company. The legislation made clear that membership was determined exclusively by entry on the register of members and Collins LJ noted that it would be unworkable if that were not so. Where it is necessary to apply the legislation to persons who are not on the register, special provisions are made. To find in the appellant’s favour would have required the Court to engage in an impermissible form of judicial legislation.

Lord Hope and Lord Rodger, concurring, elucidated the position in Scots law.

The Supreme Court thus dismissed the appeal.