England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Claimant Defendant
		22 May 2009

Introduction

1. This is a reserved judgment in relation to the trial of a preliminary issue. It raises a question as to the meaning of "subsidiary" in a charterparty where the wording has used a cross-reference to section 736 of the Companies Act 1985, which is in substance reproduced as section 1159 of the Companies Act 2006.
2. To avoid confusion as to the relevant companies, I will refer to the parties and the other relevant companies as follows:-

"Parent" – Asco plc

"Contractor" – Claimant

"Owner" – Defendant

"Charterer" – Asco UK Ltd (formerly known as Aberdeen Service Company (North Sea) Ltd)

"Vessel" – Far Service.

3. By a charterparty dated 4^th February 1994 governed by English law the Vessel was chartered to the Charterer. The Owner acquired the Vessel in January 1998 and at the material time was party to the charterparty.
4. On 7^th July 2002 the Contractor was instructed to clean the oil tanks of the Vessel. Whilst the tanks were being cleaned by employees of the Contractor, a fire occurred in the engine room of the Vessel, causing substantial damage.
5. The Owner has brought proceedings against the Contractor in Scotland for damages claiming about £2.7 million. The Contractor contends that the Owner is not entitled to bring those proceedings because of an "indemnity" contained in the charterparty.
6. The "indemnity" is in substance a type of exemption clause which seeks to allocate insurable risk between the Owner and the Charterer and their related companies. For the purposes of the preliminary issue, the key question is whether the indemnity, i.e. the exemption, extends to the Contractor as an "Affiliate" of the Charterer.
7. In the charterparty, clause 1(a) the term "Affiliate" is defined as follows:-

" "Affiliate" means any Subsidiary of the Charterer or Customer or a company of which the Charterer or Customer are a Subsidiary or a company which is another Subsidiary of a company of which the Charterer or Customer is a Subsidiary. For the purposes of this definition "Subsidiary" shall have the meaning assigned to it by section 736 of the Companies Act 1985 …"

8. At clause 1.2, the charterparty states that a reference to "any statute or statutory provision shall include a reference to any amendment, extension, consolidation or replacement thereof …".
9. At the time of the incident in July 2002, section 736 existed in a form amended by the Companies Act 1989. The relevant provisions will be set out below.
10. For the purposes of the preliminary issue I am to assume that the Contractor and the Charterer would, but for one aspect, be "Affiliates" on the basis of being each subsidiaries of the Parent. The sole question relates to the fact that the Parent has "pledged" its shares in the Contractor to the Bank of Scotland ("the Bank").
11. The word "pledge" is a well-known misnomer in this context as far as English law is concerned. As a matter of strict legal analysis in English law, only physical objects can be pledged and although shares were traditionally represented by a piece of paper called the share certificate, the correct legal analysis has always been that shares are a bundle of rights: Michaels v Harley House Ltd [2000] Ch 104 at 117G (CA). They are therefore, as a matter of strict legal analysis, intangibles and incapable of being pledged. What therefore is commonly referred to as a "pledge" is in fact a mortgage or charge. It is unnecessary for the purposes of this judgment to distinguish between mortgage and charge and I will generally refer to the creation of the security interest by "pledge" as a "charge".
12. The general way in which security is created over shares under English law is in the form of an equitable charge, traditionally by means of handing over a share certificate and signed transfer forms, enabling the security holder, if it enforces, to become registered as a member of the company as part of the enforcement process. It is however possible for a legal mortgage or charge to be created by registering the security holder as a member of the company, but contracting to leave the control of voting and the receipt of dividends in the hands of the chargor until enforcement.
13. In the present case, there was a Scottish law "Deed of Pledge" by the Parent in favour of the Bank in respect of the Parent's shares in the Contractor. The Parent is a Scottish registered company. This Scottish law "pledge" required the Bank or its nominee to become the registered holder of the "pledged" shares. However, the Deed makes it clear that the registration of the Bank or its nominee in the Register of Members of the Contractor is for the purposes of security only. With regard to the voting powers relating to the shares in the Contractor, clause 5(A) of the Deed provides:-"The full voting and other rights and powers in respect of the shares shall be exercised on all matters by the Pledgor …"

subject to an express proviso protecting the security. Clause 2(b) provides that all dividends are to be paid to the Pledgor.

14. There is no doubt that but for the "pledge" of the Parent shares in the Contractor, the Contractor for the purposes of the preliminary issue fell within the "indemnity", i.e. exemption clause, allocating insurable risks between the Owner on the one hand and Charterer and Contractor on the other.
15. The fact that the Parent borrowed money from the Bank and was required to execute a Scottish law form of security which made the Bank or its nominee, as a matter of either perfecting or protecting the Bank's security, a registered member of the Contractor in place of the Parent, but with all the key rights exercisable by the Parent, would not, in the view of any reasonable businessman, make any difference to the allocation of insurable risk as between Owner and Charterer and their related companies. The transfer of registration of membership is a mere technicality required to perfect or protect the Bank's security.
16. The question raised by the preliminary issue is whether the law, and in particular the cross-reference to section 736 of the Companies Act 1985 (or now its Companies Act 2006 equivalent) comes to a different conclusion.

Approach to Construction

17. The words "Affiliate" and "subsidiary" must be construed in the context of the contract and against the relevant factual and commercial background known to the parties.
18. In the charterparty, the parties to the contract have chosen to cross-refer to section 736 of the Companies Act 1985 as amended from time-to-time. This raises two sub-issues. The first sub-issue is whether, even after the "pledge" of the Parent's shares in the Contractor to the Bank the Contractor would be considered the subsidiary of the Parent for the purposes of section 736 of the Companies Act 1985. The second sub-issue is whether, even if the Contractor would no longer be considered to be a subsidiary pursuant to section 736 if the statute alone were considered, a different result pertains because the question arises in the context of the charterparty.
19. In my judgment, although the two sub-issues can conveniently be separated for the purposes of legal analysis, there is in truth only one question, and that is the meaning of the cross-reference in the context of the charterparty itself.
20. It is often not appreciated that when a section of a statute is incorporated into a contract by cross-reference, the effect of the cross-reference is to treat the statutory provisions as being set out in the contract and to take its meaning from that context. This meaning may not be the same meaning as the provision has in the context of the statute itself or in another context.
21. Ms Melwani for the Charterer cites in support of this approach the Court of Appeal decision in Brett v The Brett Essex Golf Club Limited (1986) 278 EG 1476. That case concerned the construction of a rent review clause in a lease and in particular the construction and effect of a reference in that clause to section 34 of the Landlord and Tenant Act 1954. The issue in that case was a question of interpretation of a clause in the lease relating to the determination of "open market rental value" which was to be carried out "disregarding if applicable those matters set out in paragraphs (a) (b) and (c)" of section 34 of the 1954 Act as originally enacted." The Court of Appeal accepted certain submissions of Counsel (Mr. Steinfeld QC) as follows:-

"The relevant words in clause 4(1) constitute simply a shorthand method of incorporating in the sub-clause as matters to be disregarded, the matters set out at paragraphs (a) (b) and (c) of section 34. That sub-clause can and should accordingly be read as though it contained an express provision directing disregard of, inter alia, "Any effect on rent of any improvement carried out by the tenant or a predecessor in title of his otherwise than in pursuance of an obligation to his immediate landlord". It is these words as incorporated in the sub-clause that fall to be construed and not the same words in the context of the statutory scheme from which they have been lifted. In the "Wonderland" Cleethorpes case, he reminded us, the House of Lords was concerned with the construction of paragraph (c) of section 34 in the context of an application for a tenant for a new tenancy under the 1954 Act, following the expiry of the previous tenancy. In his submission it does not follow that the same words must be given the same construction in the different context of the 1978 lease. As will appear a little later, I think the speeches in the "Wonderland" Cleethorpes case give us helpful guidance by analogy in deciding the present issue. Subject to this qualification, I would accept in their entirety these submissions …". [emphasis added]

22. It follows that the cross-reference to section 736 of the Companies Act 1985 as it stood at the time of the incident in July 2002 must be treated as being incorporated in the charterparty and needs to be construed in that context.

The statutory provisions

23. I set out below section 736 as amended as it stood at the time of the incident and section 736A which supplemented it at that stage:

736 "Subsidiary", "holding company" and "wholly-owned subsidiary"

(1) A company is a "subsidiary" of another company, its "holding company", if that other company—

(a) holds a majority of the voting rights in it, or

(b) is a member of it and has the right to appoint or remove a majority of its board of directors, or

(c) is a member of it and controls alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights in it, or if it is a subsidiary of a company which is itself a subsidiary of that other company.

(2) A company is a "wholly-owned subsidiary" of another company if it has no members except that other and that other's wholly-owned subsidiaries or persons acting on behalf of that other or its wholly-owned subsidiaries.

(3) In this section "company" includes any body corporate.

736A Provisions supplementing s. 736

(1) The provisions of this section explain expressions used in section 736 and otherwise supplement that section.

(2) In section 736(1)(a) and (c) the references to the voting rights in a company are to the rights conferred on shareholders in respect of their shares or, in the case of a company not having a share capital, on members, to vote at general meetings of the company on all, or substantially all, matters.

(3) In section 736(1)(b) the reference to the right to appoint or remove a majority of the board of directors is to the right to appoint or remove directors holding a majority of the voting rights at meetings of the board on all, or substantially all, matters; and for the purposes of that provision—

(a) a company shall be treated as having the right to appoint to a directorship if—

(i) a person's appointment to it follows necessarily from his appointment as director of the company, or

(ii) the directorship is held by the company itself; and

(b) a right to appoint or remove which is exercisable only with the consent or concurrence of another person shall be left out of account unless no other person has a right to appoint or, as the case may be, remove in relation to that directorship.

(4) Rights which are exercisable only in certain circumstances shall be taken into account only—

(a) when the circumstances have arisen, and for so long as they continue to obtain, or

(b) when the circumstances are within the control of the person having the rights;

and rights which are normally exercisable but are temporarily incapable of exercise shall continue to be taken into account.

(5) Rights held by a person in a fiduciary capacity shall be treated as not held by him.

(6) Rights held by a person as nominee for another shall be treated as held by the other; and rights shall be regarded as held as nominee for another if they are exercisable only on his instructions or with his consent or concurrence.

(7) Rights attached to shares held by way of security shall be treated as held by the person providing the security—

(a) where apart from the right to exercise them for the purpose of preserving the value of the security, or of realising it, the rights are exercisable only in accordance with his instructions;

(b) where the shares are held in connection with the granting of loans as part of normal business activities and apart from the right to exercise them for the purpose of preserving the value of the security, or of realising it, the rights are exercisable only in his interests.

(8) Rights shall be treated as held by a company if they are held by any of its subsidiaries; and nothing in subsection (6) or (7) shall be construed as requiring rights held by a company to be treated as held by any of its subsidiaries.

(9) For the purposes of subsection (7) rights shall be treated as being exercisable in accordance with the instructions or in the interests of a company if they are exercisable in accordance with the instructions of or, as the case may be, in the interests of—

(a) any subsidiary or holding company of that company, or

(b) any subsidiary of a holding company of that company.

(10) The voting rights in a company shall be reduced by any rights held by the company itself.

(11) References in any provision of subsections (5) to (10) to rights held by a person include rights falling to be treated as held by him by virtue of any other provision of those subsections but not rights which by virtue of any such provision are to be treated as not held by him.

(12) In this section "company" includes any body corporate

24. For the purposes of the preliminary issue, I must assume that the Parent, apart from the share pledge, would, within section 736(1)(c), be a member of and control, pursuant to an agreement with other shareholders or members, the majority of the voting rights in the Contractor. The Defendant's sole objection is that the Parent is not a "member" of the Contractor and has not been a "member" from the time that the shares in the Contractor came to be registered in the name of the Bank's nominee.
25. There is no doubt that as between a company and its members, a "member" is someone who is registered on the Register of Members of the company: see section 22 of the Companies Act 1985 and now section 112 of the Companies Act 2006. On the basis of this, Ms Bryant for the Defendant argues that the Parent fails to meet the "membership" condition and the Charterer cannot therefore be its "subsidiary".
26. Although that argument is easy to state and produces an understandable situation as between the company and its registered members, when such an approach is applied to situations concerning third parties it departs from any kind of commercial reality or business sense. A holding company which is undoubtedly the holding company of a subsidiary does not as a matter of commercial common sense cease to be such simply as a result of "pledging" the shares in the subsidiary as security, even if the form of security requires registration of the shares in the name of the security holder or its nominee.
27. Section 736A supplements section 736 and appears to be a reforming provision designed to align section 736 with commercial reality and to prevent evasion. Section 736A(7) refers specifically to a situation where shares are used as security. It provides that "rights attached to shares held by way of security" shall be treated as held by the person providing the security in two situations. The parties here agree that situation (b) applies, i.e. the shares are held in connection with the granting of loans as part of the normal business activities and apart from the right to exercise them for the purpose of preserving the value of the security or of realising it, the rights are exercisable only in the interests of the party providing the security.
28. It seems to me that subsection (7) can cover two types of situations. The shares can be "held by way of security" in the sense of, for example, receiving a share certificate and transfer forms made out to the security holder, i.e. by way of equitable charge. Alternatively, the shares could be "held by way of security" by being registered in the name of the security holder or its nominee but, as set out in (b), apart from preserving or realising the security, the rights being exercisable only in the interests of the security provider. In purely technical terms, "held" better describes the position of a registered holder, but in this context it seems to apply to both types of security.
29. If it is right to treat section 736A(7) as covering inter alia a situation where shares are held by way of security and registered in the name of the security holder or its nominee, the question arises as to what is meant by treating the "rights attached to the shares" as being held by the person providing the security.
30. It must often happen that all of a holding company's shares in a subsidiary are used as security. In such a situation, unless being treated as holding "rights attached to the shares" includes being treated as a registered member, then subsection (7) will lack any effect, save in cases where the shares used as security carry a majority of voting rights for the purposes of s.736(1)(a). Supposing the shares given as security carry a minority of the voting rights but carry the right to appoint a majority of the board within s.736 (1)(b)? Or supposing the holding company has a minority of the shares but by agreement with other shareholders controls a majority of the voting rights within s.736(1)(c)? It would be absurd if in these cases the giving of security which involved the security holder or its nominee being registered pursuant to the security produced a different result.
31. It is not absolutely clear whether "rights" in subsection (7) refer only to the specific rights mentioned in earlier subsections, namely voting rights and rights to appoint or remove directors, but of course those are the key rights in this context in any event and are normally held by the registered holders of the shares.
32. The essential question here is whether treating the rights to vote and appoint directors as being held by the provider of the security also requires the provider of the security to be treated as the registered member. It seems to me that it does, since the alternative makes no sense.
33. It also seems to me that when one is considering reforms intended to prevent evasion of the provisions in contexts affecting third parties, an interpretation which allows simple evasion should be avoided if at all possible. If a holding company holding a minority voting stake but falling within s.736(1)(b) or (c) could simply cease to be a holding company by agreeing to have its bank (or the bank's nominee) registered as holder of the shares given as security, this would make evasion very simple. The holding company could retain the right to appoint a majority of the board and could retain control of a majority of the voting rights by an agreement with other shareholders but cease to be the holding company.
34. It would obviously be simpler if section 736A(7) had spelt out the fact that even where shares being held by way of security are put into the name of the security holder (or its nominee) and the security holder (or its nominee) is entered on the register of members, the security provider is still treated as if he were the member for the purposes of section 736. However, the reason that appears not to have been done is because the provision of security is not, in England at least, typically by that method. Nevertheless, any provision for security situations would obviously want to include security in that form. It seems to me that the apparent vagueness of the wording of section 736A(7) comes about because it attempts to cover the provision of security both by way of equitable charge and by way of registering the security holder or its nominee as member.
35. In fact, as a technical matter, "shares held by way of security" better describes shares being registered in the name of a security holder or its nominee than a security holder which only has a certificate and transfer forms. An equitable chargee does not, in a technical sense "hold" the shares at all, but only "holds" a security interest in them, whereas a security holder who is registered as holder does undoubtedly "hold" the shares.
36. A construction of subsection (7) which treats the provider of the present type of security as a registered member is also the only interpretation that makes any commercial sense in the context of the charterparty. It can be achieved by using the width and flexibility of the wording of 736A(7) to treat the provider of security as the registered holder of the shares where they are registered in the name of the security holder or its nominee, either from the start of the arrangement or for that matter as part of perfection or enforcement of security subsequently.

Need to avoid absurdity

37. It is easy to state examples of the absurdity of any other reading of section 736A(7) in the context of the charterparty in this case.
38. For example, if the security in the present case had been taken in the usual English form of an equitable charge there would, initially, have been no change of registration and no difficulty. The Bank however would have had the power, if it enforced the security, to put itself on the register instead of the Parent. This could lead to a situation where, if the damage had occurred in the present case on say the first of the month, prior to enforcement, the "indemnity" would apply and the insurable risk would be allocated to the Owner and its insurers, whereas if on the second day of the month the security had been enforced and the Bank got itself registered instead of the Parent as holder of the shares in the Contractor, and the damage occurred on the third day of the month, the risk would, as a result of the actions of the Bank, have become re-allocated to the Contractor and its insurers. The Owner and its insurers would probably know nothing of this at the time and would be expecting to have the loss fall on them, until they subsequently discovered their luck in the timing of the enforcement of the security by the Bank. It is impossible to believe that sane businessmen would have agreed to allocate risk on this basis.
39. Even if the express terms of section 736A(7) as incorporated into the charterparty were not on their literal terms wide enough to cover such a situation, the House of Lords has recognised that words can be given a non-literal meaning in order to avoid commercial absurdity: Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191, 201 per Lord Diplock:-"If detailed semantec and syntactical analysis of a word in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense."
40. The rejection of literalism when it conflicts with commercial common sense has been continued by subsequent House of Lord decisions such as Mannai Investment Co Limited v Eagle Star Life Assurance Co Limited [1997] AC 749, 771 per Lord Steyn and Sirius International Insurance Co v FAI General Insurance Limited [2004] 1 WLR 325 1 at paragraph 19 per Lord Steyn.

An easy "fix"?

41. One of Ms Bryant's arguments for the Owner was that the failure to fulfil the membership requirement could easily have been prevented by the Parent, because it could have agreed with the Bank to remain registered in respect of one share, suitably denuded of any value, and that would have fulfilled the membership requirement. I'm afraid this suggestion appears to have no relation to commercial sense or reality. I very much doubt whether the Bank would have agreed to such an unusual course, but in any event a construction of our legislation which requires such a pointless step would divorce it from the understanding and expectations of commercial parties and bring it into disrepute.

Conclusion on the preliminary issue

42. I therefore conclude that the Contractor was an "Affiliate" of the Charterer on the true construction of the charterparty on the assumptions I have been asked to make about the facts, notwithstanding the fact that the Parent's shares in the Contractor have been "pledged" to the Bank by a method which involves the registration of the shares in the name of the Bank's nominee as a member of the Contractor by way of security.

Other contexts

43. Although it is not necessary for me to come to any decision about the meaning of "subsidiary" in any other context than the meaning of "Affiliate" in the charterparty in the present case, since the matter has been fully argued and is of some general importance, and there is no authority directly in point, I will set out my views on the arguments put before me in relation to the more general issue as to the extended meaning of "subsidiary" under section 736 and section 736A.
44. Firstly, it seems to me that, as I indicated above, the meaning of "subsidiary" depends on the context and the purpose for which the question is raised. Whilst a company can in its constitutional document provide that it will only recognise persons on its Register of Members as members, the situation becomes more complicated once third parties are involved. As I have indicated above, this appears to be the reason why section 736 of the Companies Act 1985 was expanded and reformed, apparently to prevent evasion, by the Companies Act 1989.
45. Secondly, even in terms of the expanded and reformed definition of "subsidiary", one needs to look at the context in which the definition is to operate. There are a number of significant areas affecting third parties where the concept of "subsidiary" has significance. Counsel for the Contractor have very helpfully provided a table of relevant provisions in the Companies Act 1985 as amended, with the corresponding provisions of the Companies Act 2006, setting out key areas where the concept of "subsidiary", and its counterpart "holding company" has real importance in a context affecting third parties.

COMPANIES ACT 1985 (As Amended)	COMPANIES ACT 2006
Section 23 "(1) Except as mentioned in this section, a body corporate cannot be a member of a company which is its holding company and any allotment or transfer of shares in a company to its subsidiary is void. (2) The prohibition does not apply where the subsidiary is concerned only as personal representative or trustee unless, in the latter case, the holding company or a subsidiary of it is beneficially interested under the trust… (3) The prohibition does not apply where shares in the holding company are held by the subsidiary in the ordinary course of its business as an intermediary."	Section 136 "(1) Except as provided by this Chapter— (a) a body corporate cannot be a member of a company that is its holding company, and (b) any allotment or transfer of shares in a company to its subsidiary is void. (2) The exceptions are provided for in— section 138 (subsidiary acting as personal representative or trustee), and section 141 (subsidiary acting as authorised dealer in securities)."
Section 151 "(1) Subject to the following provisions of this Chapter, where a person is acquiring or is proposing to acquire shares in a company, it is not lawful for the company or any of its subsidiaries to give financial assistance	Section 678 (1) Where a person is acquiring or proposing to acquire shares in a public company, it is not lawful for that company, or a company that is a subsidiary of that company, to give financial assistance directly or indirectly for

COMPANIES ACT 1985 (As Amended)	COMPANIES ACT 2006
directly or indirectly for the purpose of that acquisition before or at the same time as the acquisition takes place. (2) Subject to those provisions, where a person has acquired shares in a company and any liability has been incurred (by that or any other person), for the purpose of that acquisition, it is not lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of reducing or discharging the liability so incurred. (3) If a company acts in contravention of this section, it is liable to a fine, and every officer of it who is in default is liable to imprisonment or a fine, or both."	the purpose of the acquisition before or at the same time as the acquisition takes place. (2) Subsection (1) does not prohibit a company from giving financial assistance for the acquisition of shares in it or its holding company if— (a) the company's principal purpose in giving the assistance is not to give it for the purpose of any such acquisition, or (b) the giving of the assistance for that purpose is only an incidental part of some larger purpose of the company, and the assistance is given in good faith in the interests of the company. (3) Where— (a) a person has acquired shares in a company, and (b) a liability has been incurred (by that or another person) for the purpose of the acquisition, it is not lawful for that company, or a company that is a subsidiary of that company, to give financial assistance directly or indirectly for the purpose of reducing or discharging the liability if, at the time the assistance is given, the company in which the shares were acquired is a public company. (4) Subsection (3) does not prohibit a company from giving financial assistance if— (a) the company's principal purpose in giving the assistance is not to reduce or discharge any liability incurred by a person for the purpose of the acquisition of shares in the company or its holding company, or (b) the reduction or discharge of any such liability is only an incidental part of some larger purpose of the company, and the assistance is given in good faith in the interests of the company. (5) This section has effect subject to sections 681 and 682 (unconditional and conditional exceptions to prohibition). Section 679 (1) Where a person is acquiring or proposing to acquire shares in a private company, it is not lawful for a public company that is a subsidiary of that company to give financial assistance directly or indirectly for the purpose of the acquisition before or at the same time as the acquisition takes place…
Section 320 "(1) With the exceptions provided by the section next following, a company shall not enter into an arrangement—	Section 190 (1) A company may not enter into an arrangement under which—

COMPANIES ACT 1985 (As Amended)	COMPANIES ACT 2006
(a) whereby a director of the company or its holding company, or a person connected with such a director, acquires or is to acquire one or more non-cash assets of the requisite value from the company; or (b) whereby the company acquires or is to acquire one or more non-cash assets of the requisite value from such a director or a person so connected, unless the arrangement is first approved by a resolution of the company in general meeting and, if the director or connected person is a director of its holding company or a person connected with such a director, by a resolution in general meeting of the holding company."	(a) a director of the company or of its holding company, or a person connected with such a director, acquires or is to acquire from the company (directly or indirectly) a substantial non-cash asset, or (b) the company acquires or is to acquire a substantial non-cash asset (directly or indirectly) from such a director or a person so connected, unless the arrangement has been approved by a resolution of the members of the company or is conditional on such approval being obtained. For the meaning of "substantial non-cash asset" see section 191. (2) If the director or connected person is a director of the company's holding company or a person connected with such a director, the arrangement must also have been approved by a resolution of the members of the holding company or be conditional on such approval being obtained. (3) A company shall not be subject to any liability by reason of a failure to obtain approval required by this section. (4) No approval is required under this section on the part of the members of a body corporate that— (a) is not a UK-registered company, or (b) is a wholly-owned subsidiary of another body corporate. (5) For the purposes of this section— (a) an arrangement involving more than one non-cash asset, or (b) an arrangement that is one of a series involving non-cash assets, shall be treated as if they involved a non-cash asset of a value equal to the aggregate value of all the non-cash assets involved in the arrangement or, as the case may be, the series. (6) This section does not apply to a transaction so far as it relates— (a) to anything to which a director of a company is entitled under his service contract, or (b) to payment for loss of office as defined in section 215 (payments requiring members' approval).
Section 330 (1) The prohibitions listed below in this section are subject to the exceptions in sections 332 to 338.	Section 197 (1) A company may not— (a) make a loan to a director of the company or of its holding company, or (b) give a guarantee or provide security in

COMPANIES ACT 1985 (As Amended)

COMPANIES ACT 2006

(2) A company shall not— (a) make a loan to a director of the company or of its holding company; (b) enter into any guarantee or provide any security in connection with a loan made by any person to such a director. (3) A relevant company shall not— (a) make a quasi-loan to a director of the company or of its holding company; (b) make a loan or a quasi-loan to a person connected with such a director; (c) enter into a guarantee or provide any security in connection with a loan or quasi-loan made by any other person for such a director or a person so connected. (4) A relevant company shall not— (a) enter into a credit transaction as creditor for such a director or a person so connected; (b) enter into any guarantee or provide any security in connection with a credit transaction made by any other person for such a director or a person so connected. (5) For purposes of sections 330 to 346, a shadow director is treated as a director. (6) A company shall not arrange for the assignment to it, or the assumption by it, of any rights, obligations or liabilities under a transaction which, if it had been entered into by the company, would have contravened subsection (2), (3) or (4); but for the purposes of sections 330 to 347 the transaction is to be treated as having been entered into on the date of the arrangement. (7) A company shall not take part in any arrangement whereby— (a) another person enters into a transaction which, if it had been entered into by the company, would have contravened any of subsections (2), (3), (4) or (6); and (b) that other person, in pursuance of the arrangement, has obtained or is to obtain any benefit from the company or its holding company or a subsidiary of the company or its holding company.

connection with a loan made by any person to such a director, unless the transaction has been approved by a resolution of the members of the company. (2) If the director is a director of the company's holding company, the transaction must also have been approved by a resolution of the members of the holding company. (3) A resolution approving a transaction to which this section applies must not be passed unless a memorandum setting out the matters mentioned in subsection (4) is made available to members— (a) in the case of a written resolution, by being sent or submitted to every eligible member at or before the time at which the proposed resolution is sent or submitted to him; (b) in the case of a resolution at a meeting, by being made available for inspection by members of the company both— (i) at the company's registered office for not less than 15 days ending with the date of the meeting, and (ii) at the meeting itself. (4) The matters to be disclosed are— (a) the nature of the transaction, (b) the amount of the loan and the purpose for which it is required, and (c) the extent of the company's liability under any transaction connected with the loan. (5) No approval is required under this section on the part of the members of a body corporate that— (a) is not a UK-registered company, or (b) is a wholly-owned subsidiary of another body corporate. Section 198 (1) This section applies to a company if it is— (a) a public company, or (b) a company associated with a public company. (2) A company to which this section applies may not— (a) make a quasi-loan to a director of the company or of its holding company, or (b) give a guarantee or provide security in connection with a quasi-loan made by any person to such a director, unless the transaction has been approved by a

COMPANIES ACT 1985 (As Amended)	COMPANIES ACT 2006
	resolution of the members of the company.
Section 433 "If inspectors appointed under section 431 or 432 to investigate the affairs of a company think it necessary for the purposes of their investigation to investigate also the affairs of another body corporate which is or at any relevant time has been the company's subsidiary or holding company, or a subsidiary of its holding company or a holding company of its subsidiary, they have power to do so; and they shall report on the affairs of the other body corporate so far as they think that the results of their investigation of its affairs are relevant to the investigation of the affairs of the company first mentioned above."	Part 32 Section 1035 (1) In Part 14 of the Companies Act 1985 (c. 6)(investigation of companies and their affairs), after section 446 insert— 446A General powers to give directions (1) In exercising his functions an inspector shall comply with any direction given to him by the Secretary of State under this section. (2) The Secretary of State may give an inspector appointed under section 431, 432(2) or 442(1) a direction— (a) as to the subject matter of his investigation (whether by reference to a specified area of a company's operation, a specified transaction, a period of time or otherwise), or (b) which requires the inspector to take or not to take a specified step in his investigation. … (5) In this section— (a) a reference to an inspector's investigation includes any investigation he undertakes, or could undertake, under section 433(1)(power to investigate affairs of holding company or subsidiary); … 446B Direction to terminate investigation (1) The Secretary of State may direct an inspector to take no further steps in his investigation. … (6) In this section, a reference to an inspector's investigation includes any investigation he undertakes, or could undertake, under section 433(1)(power to investigate affairs of holding company or subsidiary)."

46. It can be seen from the above that there are very important provisions relating to financial assistance, directors acquiring non-cash assets or loans and powers of inspectors which depend to some extent, both under the Companies Act 1985 as amended and under the Companies Act 2006 on either the term "subsidiary" or its counterpart, "holding company".
47. If one considers these provisions, which have a potentially very significant impact on third parties and the public interest, in the context of a situation where security is given over shares held by a party which would otherwise undoubtedly be a "holding company" in relation to shares held in what would otherwise undoubtedly be a "subsidiary", it seems to me to make no sense to treat (a) the giving of security by way of equitable charge, without any change to registration and (b) the mode of giving security in the present case, involving change of registration, in different ways. Likewise, it seems to me that for these purposes, it cannot sensibly make any difference whether, in the case of an equitable charge, the registration has been changed as part of a perfection or an enforcement process.
48. Accordingly, it seems to me clear that section 736A(7) can only sensibly be read, in the material contexts involving third parties, as including a situation where a "holding company" would be a "holding company" but for a change of registration relating to shares in a "subsidiary" by reason of the protection, taking or enforcement of security.
49. Ms Bryant for the Owner argued forcefully against this interpretation, partly on the grounds of certainty. Although certainty is a very important principle in both statutory interpretation and commercial dealings, it cannot in my judgment lead to a commercial nonsense or to a situation where the anti-evasion provisions of a statute can easily be avoided.
50. Ms Bryant relies on two texts which she submits support the Owner's interpretation of section 736 and 736A.
51. Ms Bryant firstly cites Buckley on the Companies Acts at paragraph 736A.8, which is a comment on section 736A(3). At the last sentence of that comment Buckley states:-

"Semble, where shares in company B are held by a nominee for company A, sub-s (6) does not require company A to be treated as a member of company B for the purposes of CA 1985, s.736(1)."

52. I find this passage very odd, for several reasons. Firstly, I am not at all sure why the comment is annotated under sub-section (3). Secondly, it is not clear why there is nothing about this in the annotation to sub-section (6). Thirdly, the comment gives no reasoning or explanation and can therefore have little force.
53. In my opinion, much the same reasoning as that which applies to sub-section (7) applies to sub-section (6), in fact probably more so. It is difficult to envisage how rights, and in particular rights to vote and appoint directors are likely to be "held by a person as nominee for another" unless the nominee is the registered member. Even if one assumes that such rights can be held by others, the nominee registered as holder of shares is the typical example. Accordingly, sub-section (6) must be referring to, or at least include, situations where the holding of rights by a nominee involves registration of the nominee as member. If those rights are, pursuant to sub-section (6) to be treated as held by the party for whom the nominee holds, then it seems to me that in such situations subsection (6) can only make sense if the party for whom the nominee holds is treated as the registered holder of the relevant shares.
54. Holding of shares by nominees is an everyday occurrence and in fact the shares held by the Bank in this case are held by its nominee. If the shares registered in the name of a nominee are all the holding company's shares in a subsidiary but do not carry majority voting rights, all the absurd anomalies mentioned above in relation to subsection (7) would apply.
55. Ms Bryant also relies on Tolley's Company Law. Tolley contains the following passage in relation to section 736A:-

"Although the generally applicable provisions of section 736A referred to at H5002 above applied to the right to appoint or remove directors (so that, for example, rights held by a nominee for another person are treated as held by that other person), it seems inappropriate that the provisions of section 736A should operate so as to deem a person to be a "member" of a company if he is not actually a member (in the case of a company incorporated under the Companies Act 1985, by having been entered in its register of members: CA 1985, s.22). The better view seems to be that the references to "rights" in those tests [sic] only qualify "voting rights" and "rights" where they are used in section 736 and section 736A and that such references do not apply to the status of membership. This view is supported by the fact that in section 736 there is no corresponding provision to the membership deeming provision of section 258(3) of the Companies Act 1985, discussed at H5016 below, which contains the corresponding accounts test. The view is also supported by section 736(2) which defines a "wholly-owned subsidiary" as a company that has no members except for H and H's wholly-owned subsidiaries or persons acting on behalf of H or its wholly-owned subsidiaries. If the reference to "members" were subject to the attribution rules under section 736A, the emphasised words would appear to be unnecessary. If this view is correct, it is an important qualification of condition (b) - the condition will only apply if the person having the right to appoint or remove a majority of the directors is actually on the Register of S as a member".

56. For reasons set out above, this approach appears to make no commercial sense and leads to absurdity. Nor does it accord with the typical situations in the relevant sub-sections which, for example in the case of nominees and security holders, may well include the nominee or security holder being registered. Nevertheless, I will examine the two items of reasoning given to support Tolley's approach.
57. The first point is that there is in section 736 as amended no provision which corresponds to the membership deeming provision of section 258(3) of the Companies Act 1985. However, that is a completely separate provision constituting the implementation of a European directive, being the Seventh Company Law Directive on Consolidated Accounts. Moreover, for reasons I have already explained above, there are reasons stemming from the way in which section 736A(7) as well as (6) are drafted which indicate why there is no specific reference to membership. In fact each of sub-sections (5), (6) and (7) appear to be drafted in such a way that they can work whether or not the fiduciary, nominee or security holder is registered. In each case, however, he will often be registered and in my view the wording is deliberately broad and flexible to cover that situation. Both the language and the structure of section 258 of the Companies Act 1985, in implementing the Directive, is quite different.
58. With regard to the argument that certain words in section 736(2) would be unnecessary if section 736A treated the provider of security etc as members when they were not registered for the purpose of defining holding companies and subsidiaries, section 736(2) uses different language, i.e. "acting on behalf of" and not the same language as section 736A, "fiduciary", "nominee" or "by way of security". Although in many cases a person "acting on behalf of" another person will be a fiduciary or nominee, the concepts do not cover exactly the same ground, even though they will often overlap. I do not therefore find that the words in section 736(2) pointed out by Tolley are unnecessary. Even if they had been, I would not find that a conclusive consideration and would find much more weighty the considerations about interpreting the statutes so as to make commercial sense and to prevent evasion.
59. To summarise, I do not find the texts cited by Ms Bryant to be at all persuasive in relation to the correct interpretation of section 736.
60. It seems to me therefore that in the Companies Act contexts affecting third parties and the public considered above, a holding company within s.736(1)(b) or (c) remains such even where it gives all its shares in the subsidiary as security to a lender and the lender or its nominee is registered as holder of those shares as part of the perfection, protection or enforcement of security.

I direct that that pursuant to CPR PD 39A, para 6.1 no official shorthand note shall be taken at this Judgment. The copies of this version as handed down may be treated as authentic.

MR G. MOSS QC