ENVIROCO LIMITED v FARSTAD SUPPLY A/S [2009] EWCA Civ 1399

IN THE COURT OF APPEAL

(CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE, CHANCERY DIVISION

MR GABRIEL MOSS QC SITTING AS A DEPUTY HIGH COURT JUDGE

HC07C03425

[2009] EWCA Civ 1399

Case No Case No: A3/2009/1191

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Between

ENVIROCO LIMITEDRespondent

FARSTAD SUPPLY A/SAppellant

Before

Lord Justice Mummery

Lord Justice Longmore

Lord Justice Patten

Ms Ceri Bryant (instructed by HBJ Gateley Wareing) for the Appellant

Ms Poonam Melwani and Ms Saira Paruk (instructed by Clyde & Co LLP) for the Respondent

Hearing date : 1st December 2009

Date 18 December 2009

Lord Justice Patten :

Introduction

[1]On 7 th July 2002 the claimant and respondent to this appeal, Enviroco Limited ("Enviroco"), was instructed to clean the tanks of the oil rig supply vessel, MV Far Service ("the vessel"), prior to its sailing to one of BP's North Sea oil platforms. The vessel is owned by the appellant, Farstad Supply A/S ("Farstad"), but was chartered to Asco UK Limited ("Asco UK") under a charterparty dated 4 th February 1997.

[2]The cleaning operation took place while the vessel was berthed at Peterhead. During the course of it, oil which had been removed from the tanks came into contact with an ignition source and caused a serious fire in the engine room which killed one of Enviroco's employees and caused substantial damage to the vessel. On 26 th March 2007 proceedings were issued in Scotland by Farstad against Enviroco for damages amounting to some £2.7 million.

[3]Clause 33 of the charterparty contains a series of indemnities by Farstad in favour of Asco UK and its "affiliates" including one in respect of all claims and liabilities resulting from loss and damage to the vessel. "Affiliate" is defined in clause 1(a) of Part B of the charterparty in these terms :- "'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 in Section 736 of the Companies Act 1985".

[4]Clause 1.2 of Part B states that a reference to:- "a) any statute or statutory provision shall include a reference to any amendment, extension, consolidation or replacement thereof and any order, instrument or other subordinate legislation made thereunder;"

[5]By the time of the accident in July 2002 s.736 of the Companies Act 1985 had been amended by the Companies Act 1989 and it is common ground that these are the provisions which are applied by clause 1(a) to determine the scope of the indemnity contained in clause 33. The relevant sections are ss. 736 and 736A which provided as follows:- "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(l)(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."

[6]These provisions have been reproduced (without any material amendment) in what is now s.1159 and Schedule 6 of the Companies Act 2006 but, on this appeal, we are concerned only with the 1985 Act.

[7]The charterparty is governed by English law and in clause 48 contains a choice of forum clause nominating the High Court in London as having exclusive jurisdiction over any dispute arising out of the charter. Enviroco contends that it was, at all material times, an affiliate of Asco UK within the meaning of clause 1(a) and is therefore entitled to rely on the indemnity in answer to Farstad's claim in the Scottish proceedings. It has therefore commenced an action against Farstad in England seeking a declaration to this effect.

[8]The pleaded basis of its claim is that both it and Asco UK are subsidiaries of a third company, ASCO plc . Enviroco's case on this is set out in paragraph 26 of the amended Particulars of Claim. It is pleaded that the company was a subsidiary of ASCO plc within the meaning of s.736(1 )(c) of the 1985 Act because ASCO plc was a member of Enviroco and controlled alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights. No reliance is placed on either s.736(1 )(a) or s.736(1 )(b) because ASCO plc does not have control in the senses described there except with the assistance of others. This is because in November 1999 the share capital of Enviroco (which, prior to that date, was registered in the name of ASCO plc ) was split into A and B shares. ASCO plc thereafter held and was shown on the Register of Members as the holder of 333,751 A shares with an equal number of B shares being registered in the name of Stoneyhill Waste Management Limited. Since then ASCO plc has never held more than 50% of the issued share capital of Enviroco.

[9]On those facts Enviroco would have qualified as a subsidiary of ASCO plc within the meaning of s.736. But, on 11 th May 2000, it charged its shares in the company to the Bank of Scotland under a deed of pledge which, as a term of the security, required the shares to be registered in the name of the bank or its nominee. This was duly done. Clause 4 of the deed provided that until the security became enforceable "the full voting and other rights and powers in respect of the Shares" should be exercised by ASCO plc as the bank's proxy subject to a proviso that these powers should not be exercised in a manner which would adversely affect the value of the security or result in the shares being registered in the name of anyone but the bank.

[10]Farstad's case is that, as a result of the deed of pledge and the registration of the bank as the holder of the shares, ASCO plc ceased to be a member of Enviroco so that the latter does not qualify as its subsidiary under the terms of s.736(l)(c). A "member" is defined by s.22 of the 1985 Act in these terms:- "22. Definition of "member"(1) The subscribers of a company's memorandum are deemed to have agreed to become members of the company, and on its registration shall be entered as such in its register of members.

(2) Every other person who agrees to become a member of a company, and whose name is entered in its register of members, is a member of the company."

[11]It is accepted that neither of these provisions applies to ASCO plc in the present case.

[12]Miss Melwani on behalf of Enviroco accepts, I think, that if one looks at s.736(l) alone the words "is a member of it" in subsection 736(1 )(c) have to be given the meaning prescribed by s.22. No other approach is possible. The statutory definition contained in that section is unqualified and is of general application throughout the Act. But she says (and pleads) that the condition of membership is satisfied in this case by a process of attribution derived from the provisions of s.736A(7). The rights attached to the shares are to be treated as held by Enviroco and these rights must include the right to be registered as a member. ASCO plc must, in these circumstances, be regarded as a member of Enviroco for the purposes of s.

(c) The preliminary issue

[13]At a case management conference on 30 th October 2008 Master Bowles ordered the trial of a preliminary issue. It was framed in terms of whether Enviroco was, as at 7 th July 2002, a subsidiary of ASCO plc within the meaning of s.736(l)(c). It came for trial before Mr Gabriel Moss QC (sitting as a Deputy High Court Judge of the Chancery Division) on 22 nd May 2009 (

[2009] EWHC 906

Ch) . The relationship between ASCO PLC and Asco UK is not formally admitted in Farstad's defence but, for purposes of the preliminary issue, the judge took this as a fact. The argument before him focused on the question whether Enviroco was, at the relevant time, a subsidiary of ASCO plc .

[14]The deputy judge reformulated the issue as being whether, following the pledge of the shares, Enviroco remained a subsidiary of ASCO plc for the purposes of s.736 as incorporated into the charterparty. This refinement was based on the judge's view that the effect of the incorporation of statutory provisions into a contract is to treat those provisions as being set out verbatim in the contract itself with the result that they take their meaning from that context. This may result, he reasoned, in their bearing a different meaning from the one which they would have in the statute itself. As an example of this, he referred to the decision of this court in Brett v Brett Essex Golf Club Ltd (1986) 278 EG 1476.

[15]The consequence of this approach was that in the first part of his judgment he set out his conclusions on the true construction of "affiliate" in the charterparty and then proceeded (technically obiter) to consider the proper interpretation of s.736 in its statutory context. In both cases, however, his view was that the effect of s.736A(7) was to treat the person giving the security as the registered holder of the shares because any other construction would, he said, allow the easy evasion of s.736. Farstad now appeals against this decision with the leave of this court. The essence the deputy judge's reasoning is set out in the following paragraphs of his judgment:-"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. ..... 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(l)(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 (I)(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(l)(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."

[16]None of this reasoning depends upon the s.736 definition of a subsidiary being construed in its contractual as opposed to its statutory context. But the judge's preference for a construction which avoids the apparent absurdity which he identified is equated a little later in his judgment with a quotation from Lord Diplock's speech in Antaios Compania Naviera SA v Salen Rederierna AB

[1985] AC 191

and reference to the rejection of literalism exemplified by the later decisions of the House of Lords in cases such as Mannai Investment Co Limited v Eagle Star Life Assurance Co Limited

[1997] AC 749

[17]I am not persuaded that in this case the contractual context in which the statutory definition of a subsidiary is employed adds anything to what should be the correct interpretation of s.736. In Brett v Brett Essex Golf Club Ltd the draftsman of a rent review clause incorporated into the review formula the disregards "set out in paragraphs (a), (b) and (c) of Section 34 of the Landlord and Tenant Act 1954". When this kind of clause is used it is easy to treat the reference to the statutory provisions as a shorthand for the incorporation into the lease of the words of the express disregards set out in the provisions identified. But whether a reference to a statutory provision is to be taken to have this effect depends on the terms of the clause in question.

[18]In the present case, clause 1(a) of Part B of the charterparty defines "Affiliate" as including a subsidiary of the charterer or a company of which the charterer is also a subsidiary. It then goes on to state that "for the purposes of this definition "Subsidiary" shall have the meaning assigned to it in Section 736 of the Companies Act 1985". That seems to me to be an unequivocal direction to the parties and to the court that the statutory definition is to be applied. Not some alternative meaning of the same words. If Enviroco's case depends upon giving to the words of s.736 a meaning which they would not have in their statutory context then, as Mummery LJ put to Miss Mel wan i in argument, the effect is either to require one to read the last sentence of clause 1(a) as a direction to give the word "subsidiary" a meaning which is not assigned to it by s.736 or simply to delete that last sentence altogether from the contract.

[19]Neither of these approaches is, in my view, a legitimate response to the words of clause 1(a) even having regard to the more generous approach to construction outlined by the House of Lords in cases such as Mannai and Investors Compensation Scheme v West Bromwich Building Society

[1998] 1 WLR 896

[20]They were both cases in which an error had occurred in the drafting of the notice and the contract and the court had therefore to consider whether and to what extent the internal inconsistencies which this created in the document could be cured by a benign and purposive process of construction. This is made clear by Lord Hoffmann in his speech in the Investors Compensation Scheme case (at page 913) where he explains the principles in operation in cases like The Antaios which was relied on by the deputy judge:

"(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax, (see Mannai Investments Co. Ltd. v Eagle Star Life Assurance Co. Ltd. [1997] 2 WLR 945 ) (5) The "rule" that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in The Antaios Compania NavieraS.A. v Salen Rederierna A.B. [1985] 1 A.C. 191, 201: "... if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense."

[21]In Chartbrook Ltd v Persimmon Homes Ltd

[2009] UKHL 38

Lord Hoffmann has repeated (in paragraphs 14 to 15) his statement that it requires a strong case to persuade the court that something must have gone wrong with the drafting in order to justify a meaning which departs from the language actually used. In this case, there is no evidence of any mistake of that kind and I see no reason not to give the words used their ordinary and natural meaning. The draftsman has chosen to adopt the definition of subsidiary contained in the Companies Act and this court has, in my view, to apply it. The difficulty which arises in this case is the result of a mortgage transaction entered into some three years after the charterparty was signed. There is nothing to suggest that the requirements of the deed of pledge under which the bank was to become the registered shareholder in Enviroco was contemplated at that time and so formed any part of the matrix of fact against which the terms of the indemnity fall to be construed. The court has therefore to proceed on the basis that a change of shareholder was unforeseen. If the result contended for by Miss Melwani is not available to Enviroco on the proper construction of s.736 then it cannot be achieved, in my judgment, through the terms of the contract. The same meaning applies in both contexts. Section 736

[22]The provisions of s.736 represent the amalgam of various legislative changes made since 1929 when the definition of a subsidiary was first introduced. Section 127 of the Companies Act 1929 defined what was meant by a subsidiary for the purposes of the new accounting provisions contained in ss. 122-128 of the Act. Until then there was no statutory obligation imposed on a company to keep accounts. The new provisions included a requirement (s. 125) that a company which had assets comprising shares in a subsidiary company should set out details of such assets and liabilities separately from the other assets and liabilities shown on its balance sheet. Section 126 also required it to annex a statement to the accounts showing how the profit and losses of the subsidiary company had been dealt with.

[23]The definition of a subsidiary contained in s. 127 of the Act applied where the shares held by the holding company (whether directly or through a nominee) represented more than 50% of the issued share capital of the other company; carried more than 50% of the voting power; or gave the holding company power to appoint a majority of the directors. There was no reference in any of these provisions to the holding company being a '''member" of the subsidiary. There was also a provision in s. 127(2) to the effect that no account should be taken of shares held as security by a company whose only business included the lending of money. The purpose of this provision was clearly to prevent a mortgage of the shares by the holding company in one of its subsidiaries resulting in that company being deemed to be the subsidiary of the mortgagee. These provisions were eventually carried forward into what became s.736(4)(d) of the 1985 Act in its pre-1989 form.

[24]In 1945 the Cohen Committee reported on possible amendments to company law (Cmd. 6659). They criticised the existing definition of a subsidiary company in s. 127 in the context of the accounting provisions because it did not extend to sub-subsidiary companies and because the inclusion in it of a test based solely on the holding of a majority of the share capital meant that the definition included companies which might not be under the shareholder's de facto control or be ones where the majority shareholder had legal control over the appointment of a majority of the board. The Committee recommended that the question of control should, as a general rule, be decisive but that the ownership of more than 50% of the issued share capital should continue to be one of the tests of a subsidiary because that level of share ownership was likely to give the holder practical control of the business.

[25]The 1929 Act was replaced by the 1948 Companies Act which consolidated previous company legislation. But the new definition of subsidiary contained in s.154(1) of the Act did not adopt the draft clauses set out in the Cohen Report. Instead, it provided that:- "(1) For the purposes of this Act, a company shall, subject to the provisions of subsection (3) of this section, be deemed to be a subsidiary of another if, but only if,-(a) that other either - (i) is a member of it and control the composition of its board of directors; or (ii) holds more than half in nominal value of its equity share capital; or

(b) the first-mentioned company is a subsidiary of any company which is that other's subsidiary."

[26]Section 154(3) contained provisions under which shares held or powers exercisable by (e.g.) a nominee were to be treated as belonging to the person beneficially entitled to them. But the control condition in s. 154(1 )(a)(i) was supplemented with the requirement that the person exercising control should be a member of the subsidiary.

[27]The accounting provisions in the 1948 Act were amended by the Companies Act 1967 following the report of the Jenkins Committee in June 1962. They recommended that the definition of a subsidiary in s. 154(1) should be amended by deleting what was then s,154(l)(a)(ii) thereby making the sole defining conditions those of membership and control. These recommendations were directed to the provisions in the Act governing the filing of accounts. But, by then, the definition of a subsidiary was also relevant to a much wider range of other restrictions and provisions contained in the Act, such as those governing the provision of financial assistance for the acquisition of shares; the disqualifications for appointment as an auditor; the prohibition of loans to directors; and the duty to disclose directors' shareholdings and emoluments.

[28]In the event, no amendments were made to s. 154(1) by the 1967 Act and the definition of a subsidiary was continued unchanged into the original version of s.736 of the 1985 Act. The changes came with the amendments introduced by the 1989 Companies Act.

[29]The accounts provisions in the 1985 Companies Act were amended by the 1989 Act in order to give effect to the EC Seventh Company Law Directive on Consolidated Accounts (83/349/EEC). Article 1 of the Directive required Member States to impose obligations on parent undertakings to draw up consolidated accounts including the assets and liabilities of their subsidiary undertakings. The criteria for determining this relationship were set out in Article 1 of the Directive and necessitated various changes for that purpose to the definition contained in s.736. The most significant of these was a new criterion of the right to exercise a dominant influence over the undertaking by virtue of the memorandum and articles of the subsidiary undertaking or by virtue of a control contract.

[30]Article 1(1) provided that:- "1. A Member State shall require any undertaking governed by its national law to draw up consolidated accounts and a consolidated annual report if that undertaking (a parent undertaking):(a) has a majority of the shareholders' or members' voting rights in another undertaking (a subsidiary undertaking); or

(b) has the right to appoint or remove a majority of the members of the administrative, management or supervisory body of another undertaking (a subsidiary undertaking) and is at the same time a shareholder in or member of that undertaking; or

(c) has the right to exercise a dominant influence over an undertaking (a subsidiary undertaking) of which it is a shareholder or member, pursuant to a contract entered into with that undertaking or to a provision in its memorandum or articles of association, where the law governing that subsidiary undertaking permits its being subject to such contracts or provisions. A Member State need not prescribe that a parent undertaking must be a shareholder in or member of its subsidiary undertaking. Those Member States the laws of which do not provide for such contracts or clauses shall not be required to apply this provision; or

(d) is a shareholder in or member of an undertaking, and: (aa) a majority of the members of the administrative, management or supervisory bodies of that undertaking (a subsidiary undertaking) who have held office during the financial year, during the preceding financial year and up to the time when the consolidated accounts are drawn up, have been appointed solely as a result of the exercise of its voting rights; or (bb) controls alone, pursuant to an agreement with other shareholders in or members of that undertaking (a subsidiary undertaking), a majority of shareholders' or members' voting rights in that undertaking. The Member States may introduce more detailed provisions concerning the form and contents of such agreements. The Member States shall prescribe at least the arrangements referred to in (bb) above. They may make the application of (aa) above dependent upon the holding's representing 20 % or more of the shareholders' or members' voting rights. However, (aa) above shall not apply where another undertaking has the rights referred to in subparagraphs (a), (b) or (c) above with regard to that subsidiary undertaking."

[31]The Department of Trade and Industry published a consultation paper in August 1985 which raised a number of issues about the implementation of the Directive. One of these was whether the provisions of Article l(l)(a) which focuses on the holding of a majority of voting rights rather than shares should be introduced into the Companies Act for all purposes in place of what was then s.736(l)(a)(ii). In the event the Directive was implemented by introducing a new s.258 into the Act which incorporated the definition provisions contained in Article 1(1) of the Directive for accounting purposes only. Section 258 provides that:- "(1) The expressions "parent undertaking" and "subsidiary undertaking" in this Part shall be construed as follows; and a "parent company" means a parent undertaking which is a company. ¦ (2) An undertaking is a parent undertaking in relation to another undertaking, a subsidiary undertaking, if -(a) it holds a majority of the voting rights in the undertaking, or

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

(c) it has the right to exercise a dominant influence over the undertaking - (i) by virtue of provisions contained in the undertaking's memorandum or articles, or (ii) by virtue of a control contract, or

(d) it is a member of the undertaking and controls alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights in the undertaking. (3) For the purposes of subsection (2) an undertaking shall be treated as a member of another undertaking - (a) if any of its subsidiary undertakings is a member of that undertaking, or (b) if any shares in that other undertaking are held by a person acting on behalf of the undertaking or any of its subsidiary undertakings. (4) An undertaking is also a parent undertaking in relation to another undertaking, a subsidiary undertaking, if it has a participating interest in the undertaking and - (a) it actually exercises a dominant influence over it, or (b) it and the subsidiary undertaking are managed on a unified basis. (5) A parent undertaking shall be treated as the parent undertaking of undertakings in relation to which any of its subsidiary undertakings are, or are to be treated as, parent undertakings; and references to its subsidiary undertakings shall be construed accordingly. (6) Schedule 10A contains provisions explaining expressions used in this section and otherwise supplementing this section."

[32]Both Article l(l)(b) and (d) and s.258(2)(b) and (d) retained membership of the subsidiary as one of the qualifying conditions. But s.258(3) also incorporates a deeming provision which has the effect of treating the parent undertaking as a member of the subsidiary undertaking if shares in that latter company are held by a person such as a nominee acting on the parent's behalf. Actual registration as a member is not therefore necessary where the deeming provision applies.

[33]Over and above this, the expressions used in s.258 are "explained" and supplemented by those of Schedule 10A. This contains a series of provisions, all of which deal in terms with rights of one kind or another. These include the voting rights referred to in s.258(2)(a) and (d); the right to appoint or remove a majority of the board (s.258(2)(b)); and the right to exercise a dominant influence over the undertaking (s.258(2)(c)). Paragraphs 7 and 8 of the Schedule provide that:- "7. -(1) Rights held by a person as nominee for another shall be treated as held by the other.

(2) Rights shall be regarded as held as nominee for another if they are exercisable only on his instructions or with his consent or concurrence. Rights attached to shares held by way of security 8. 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, and (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."

[34]It can be seen at once that these mirror the provisions of S.736A which are also designed to explain and supplement s.736. This continues to provide the definition of a subsidiary for the other purposes such as financial assistance and directors' loans described earlier. Paragraphs 7 and 8 of Schedule 10A are the same verbatim as those of s.736A(6) and (7). The difference between the two sets of provisions lies in ss.736 and 258. The old definition of a subsidiary contained in s.736(1) of the 1985 Act has been amended by the 1989 Act so as to replace the s.736(l)(a)(ii) criterion of majority share ownership with what is now s.736(l)(a): i.e. the holding of a majority of voting rights. This reproduces s.258(2)(a). But the old s.736(l)(a)(i) is, in substance, unchanged in the amended s.736(l)(b) and the new s.736(l)(c) adopts the same format by making membership part of the qualifying condition. These provisions correspond in terms to those of ss.258(2)(b) and 258(2)(d) of the Act.

[35]What is, however, striking is that the amended s.736(l) contains no provision (similar to s.258(3)) under which the would-be parent is deemed to be a member of the subsidiary for the purposes of s.736(l)(b) and (c). The only extension of the provisions is that contained in s.736A which is in substantially the same terms as Schedule 10A. Miss Bryant therefore submits that it is not possible to read s.736A(6) or (7) as the equivalent of a deeming provision which has the effect of treating the holding company as a member of the relevant subsidiary. In this she is supported by the editors of Tolley's Company Law and of Gore-Browne. The most that those provisions do, she says, is to treat the parent company as the holder of the specified rights so that (when ss.736A(6) and (7) apply) the conditions in s.736(l) which depend on the possession of such rights are satisfied. Membership of the subsidiary is, however, a separate condition which is not catered for by S.736A and for which there is no provision equivalent to s.258(3).

[36]If this is the effect of the 1989 amendments the result is surprising because the changes to s.736 have removed the old provisions contained in s.736(4)(b) under which shares held by a nominee for the parent were treated as held by the parent. Under s.736A(6) the nominee provisions apply only to rights held by that person as nominee. This matches the change from shareholdings to voting rights in the new s.736(l)(a) but it does not (at least in terms) deal with the question of membership under s.736(l)(b) and (c).

[37]As a matter of statutory construction the question has to be whether the rights referred to in s.736A(6) and (7) include membership of the subsidiary company. Miss Melwani submits that they must include the right to be registered as a member. I disagree. Read in context, the reference to rights in both ss.736A and in Schedule 1 OA has to be a reference to the rights referred to in ss.736 and 258 respectively. The purpose of the former provisions is, in terms, to explain the expressions used in ss.736 and 258 and to supplement them. Section 736A therefore refers to the voting rights and the right to appoint or remove a majority of the board mentioned in s.736(l)(a)- (c). It does not, in my view, refer to anything else. They are the only rights referred to in the relevant sections.

[38]One can, I think, test this by looking at s.258 and Schedule 10A. As mentioned earlier, one there has the same legislative scheme and identical provisions in paragraphs 7 and 8 of Schedule 10A to those contained in s.736A(6) and (7). But the draftsman has in s.258(3) included an express provision which attributes membership of the subsidiary to the parent when the shares are held by a nominee. Miss Melwani concedes that on her argument about the meaning and effect of the words of paragraph 7 of Schedule 10A this provision is otiose.

[39]The other difficulty about Miss Melwani's construction of s.736A(7) is that it would not, by itself, make the person providing the security a "member" of the subsidiary company within the meaning of s.736(1 )(c). A right to be registered as a member is not enough. As mentioned earlier, s.22 of the 1985 Act requires the name of a member to be entered on the register. This almost certainly explains why in the case of s.258 a deeming provision was thought necessary.

[40]The deputy judge started from the proposition that it would be absurd if the giving of a charge by a parent company under which the chargee become the registered shareholder in the subsidiary meant that the statutory definition in s.736 ceased to apply to the parent chargor. But, in my view, the court is not given the power to revise the provisions of a statute simply because it takes the view that their operation may produce uncommercial results in some cases. It still has to satisfy itself that its preferred construction of the statutory language is one which can properly be attributed to the legislature. We have no way of knowing in this case whether the draftsman of the legislation had in mind the possibility of a change in registered membership of the subsidiary as between the chargor and chargee when formulating the provisions of s.736A(7). As the deputy judge pointed out, this method of charging shares is very unusual in England and it seems to me quite possible that the draftsman assumed that s.736A(7) would be effective to deal with the usual type of equitable charge. What we do know is that the draftsman plainly understood in relation to Schedule 10A that those provisions would not be effective by themselves to constitute the beneficial owner of the voting rights a member of the subsidiary company without an express provision to that effect in s.258(3).

[41]Mr Moss described s.25 8(3) as' a completely separate provision constituting the implementation of an EC directive. But that is not a sufficient reason in itself to differentiate between provisions which are, in all but one respect, materially identical. Nor does it meet Miss Bryant's argument about the limits of Schedule 1 OA in the light of s.258(3). The deputy judge's construction of s.736A(6) and (7) requires one to attribute to these provisions a much broader and quite different effect from that which would seem to apply to the very same words in paragraphs 7 and 8 of Schedule 10A.

[42]The strongest argument relied on by the deputy judge in favour of giving the provisions the purposive construction he adopted is the need to prevent evasion of the statutory provisions which depend upon the application of the s.736 definition of a subsidiary. In the case of the accounting provisions, the use of a nominee to hold the shares as a device for avoiding the application of s.258(2)(b) and (d) is nullified by the provisions of s.258(3). Why, one asks, was no similar provision introduced into s.736?

[43]Some further light was shed on this as a result of Miss Melwani's researches prior to the hearing of the appeal. She applied for and was given permission by the court to introduce Parliamentary material relating to the passage of the 1989 Companies Bill through its committee stages in both Houses. What this material discloses is that the Companies Bill, when presented, included in clause 19 the amendments to the 1985 Act to give effect to the Directive. These then took the form of draft ss.257 and 258. Section 257 was identical in form to what is now s.258. The draft s.258 contained provisions explaining the expressions used in s.257 in the same way (but not in the same terms) as what has become Schedule 10A. Clause 115 of the Bill set out the proposed amendments to s.736. The proposed new s.736(1), (6) and (7) were what became s.736(1), (2) and (3). But the draft s.736(2)-(5) contained provisions expanding upon what was meant by the voting and other rights referred to in s.736(l). Section 736(5) included a provision that:- "(d) a company shall be treated as a member of another company -(i) if any of its subsidiaries is a member of that company, or

(ii) if any shares in that other company are held by a person acting on behalf of the company or any of its subsidiaries."

[44]This is, of course, identical to the wording of what became s.258(3).

[45]At the committee stage of the Bill in the House of Commons on 8 th June 1989 the draft s.257 remained unaltered but the Government moved and carried an amendment to delete s.258 and replace it with Schedule 10A in the form which it now takes. On 22 nd June the Government moved a further amendment to clause 115 of the Bill. The effect of this was to remove subsections (2) to (5) from the proposed new s.736 and to add a new S.736A in the form which it now takes. This took the same form as Schedule 10A which was introduced by the earlier amendment. The effect of this amendment was therefore to remove s.736(5)(d) with its deeming provision but not to replace it with any equivalent to s.258(3) in the amended s.736. The statement made to the House when introducing the change was that the changes to the definition of subsidiary in s.736 were intended to "parallel" the previous changes to the definition of subsidiary undertaking in s.257 and Schedule 10A. The amendments "would ensure that where the terms overlap they do so perfectly".

[46]This was, of course, true for the provisions of Schedule 10A and S.736A but there was no discussion of the possible effects of removing the old draft s.736(5)(d) and not replacing it with an equivalent provision. The ministerial statement provides no further enlightenment on this point. One distinct possibility is that the omission of a deeming provision was a mistake and that, in seeking to reproduce in s.736A the provisions of Schedule 1 OA, the draftsman overlooked the fact that he had removed from s.736 a provision equivalent to what became s.258(3). The court does have power when construing a statute to correct obvious errors in the legislation attributable to the drafting process. The conditions for the exercise of this jurisdiction are set out in the speech of Lord Nicholls of Birkenhead in Inco Europe v First Choice Distribution

[2000] 1 WLR 586

at page 592C where he said this:- "It has long been established that the role of the courts in construing legislation is not confined to resolving ambiguities in statutory language. The court must be able to correct obvious drafting errors. In suitable cases, in discharging its interpretative function the court will add words, or omit words or substitute words. Some notable instances are given in Professor Sir Rupert Cross' admirable opuscule, Statutory Interpretation , 3rd ed., pp. 93-105. He comments, at page 103:

"In omitting or inserting words the judge is not really engaged in a hypothetical reconstruction of the intentions of the drafter or the legislature, but is simply making as much sense as he can of the text of the statutory provision read in its appropriate context and within the limits of the judicial role."

This power is confined to plain cases of drafting mistakes. The courts are ever mindful that their constitutional role in this field is interpretative. They must abstain from any course which might have the appearance of judicial legislation. A statute is expressed in language approved and enacted by the legislature. So the courts exercise considerable caution before adding or omitting or substituting words. Before interpreting a statute in this way the court must be abundantly sure of three matters: (1) the intended purpose of the statute or provision in question; (2) that by inadvertence the draftsman and Parliament failed to give effect to that purpose in the provision in question; and (3) the substance of the provision Parliament would have made, although not necessarily the precise words Parliament would have used, had the error in the Bill been noticed. The third of these conditions is of crucial importance. Otherwise any attempt to determine the meaning of the enactment would cross the boundary between construction and legislation: see Lord Diplock in Jones v. Wrotham Park Settled Estates [1980] A.C. 74, 105. In the present case these three conditions are fulfilled. Sometimes, even when these conditions are met, the court may find itself inhibited from interpreting the statutory provision in accordance with what it is satisfied was the underlying intention of Parliament. The alteration in language may be too far-reaching. In Western Bank Ltd. v. Schindler

[1977] Ch 1

, 18, Scarman L.J. observed that the insertion must not be too big, or too much at variance with the language used by the legislature. Or the subject matter may call for a strict interpretation of the statutory language, as in penal legislation. None of these considerations apply in the present case. Here, the court is able to give effect to a construction of the statute which accords with the intention of the legislature."

[47]As this makes clear, the court's power in this respect is not an unlimited one and I have some doubt whether it could be exercised so as to insert an amendment of the scale necessary in order to reproduce the equivalent of s.258(3). But Miss Melwani does not in fact invite us to approach the construction of s.736 in this way. Her submission is that the ministerial statement itself indicates that it was Parliament's intention, in effect, to match the provisions of s.736 with those of s.258 and she invites us to construe them in that light.

[48]I am unable to accept this submission. For the reasons already explained, the provisions of S.736A and Schedule 10A are all but identical. I do not see how the court can, by way of construction, read the reference to "rights" in those provisions and, in particular, in s.736A(7) as a reference to anything other than the rights described in s.736. They focus on the "expressions used in s.736": see s.736A(l). Membership of a company is not one of the rights described in s.736 nor is it a right as such at all. It is a status derived from the entry of the shareholder's name in the register of members.

[49]To meet these difficulties the draftsman introduced deeming provisions into the original drafts of both s.736 and s.258. The fact that s.258(3) remains is, to my mind, an almost decisive indication that the wording of Schedule 10A is not sufficient in itself to confirm the status of membership on the subsidiary through the provisions of paragraphs 7 and 8. The same must go for s.736A(6) and (7). I do not see how we can construe them in a different way. The removal of the deeming provision in the circumstances outlined was either accidental or deliberate. But neither possibility, in my view, really assists the respondent. Unlike the deputy judge, I do not believe that it is open to us to give s.736A(7) a different meaning and effect to the identical words contained in paragraph 8 of Schedule 10A.

[50]For these reasons, I would therefore allow the appeal.

Lord Justice Longmore :

[51]Like the Deputy Judge I have been concerned by the apparent ease with which it might be possible (if the appellants' argument on the construction of section 736 of the 1985 Act is correct) for a company to conceal the fact that it has a subsidiary behind the fact that it has mortgaged, charged or pledged its shares to a lender who requires the shares to be registered in the name of the lender (rather than the name of the beneficial owner). I am, however, persuaded that there is no escape from the construction of the statute adopted by my Lord. At least the obligation to file accounts of subsidiaries cannot be circumvented by reason of the existence of section 258(3) of the 1985 Act. But the presence of that provision in section 258 and the absence of any equivalent provision in section 736 is, of course, very striking and it is impossible to read into section 736 a provision equivalent to section 258(3).

[52]Ms Melwani then argued that, even if the statute on a strict construction meant that, during the existence of the loan and the pledge securing it, Enviroco could not be treated as a subsidiary of ASCO plc , there was no need for such a strict construction to apply to the term "subsidiary" as used in the charterparty since it would run counter to the true intent of clause 33 of the charterparty by which the owner agreed to indemnify the charterer and its "affiliates" in respect of all claims and liabilities resulting from loss or damage to the vessel. It is the word "affiliate" which means subsidiary with "the meaning assigned to it in section 736".

[53]This seems to me to be an impossible approach to the construction of the charterparty. It is, of course, the case that if the terms of a statute are incorporated into a contract by reference, the contract has to be read as if the words of the statute are written out in full to be construed, as a matter of contract, in their contractual context. So one could argue that in that context there is no reference to section 258(3) and that what have now become contractual words have to be construed without any reference to section 258(3).

[54]To my mind that is a recipe for too much uncertainty. Words in a statute necessarily have to have a certain meaning and, if the parties incorporate the words of the statute into their contract, the words must have the same meaning as they had when the statute was enacted and the charterparty was agreed. It is only if the words of the contract are actually inconsistent with the meaning of the (incorporated) statutory words (as they were in Adamastos Shipping v Anglo-Saxon Petroleum Ltd

[1958] AC 133

) that an ambiguity can be said to arise which requires the court to choose between alternative meanings. That is not this case and I agree, therefore, that this appeal should be allowed.

Lord Justice Mummery :

[55]I agree with both judgments.