Definition of subsidiary

Farstad Supply A/S (Respondent) v Enviroco Limited (Appellant)

This case, one of cleaning tanks in a ship and the occurrence of a fire went to the Supreme Court. Action was taken against the tank cleaner called Enviroco. Enviroco claimed to be protected by an indemnity clause in the charter party between ship owner and charter party because Enviroco was an affiliate of the charter party. That charter contract defined "affiliate" with reference to the definition of "subsidiary" in what is now section 736 of CA 2006. The shares in the tank cleaner had been transferred into the name of a bank as security for group borrowings. The court held that because the parent company did not hold the majority of the voting rights and was not a member of Enviroco, Enviroco did not fall within any limb of the section 736 definition of "subsidiary". Therefore Envirorco did not have the benefit of the indemnity and was, in fact, a subsidiary of the bank.

Often the bank will take a transfer form signed in its favour along with the share certificate but will not present it to the company for registration of the bank as member unless it becomes concerned there may be a default. Where registration is required at the outset the definition of "subsidiary undertaking" or some other tailored definition might be used when drafting contracts.

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