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Supreme Court rules that a company whose shares are secured in favour of a lender may no longer form part of the corporate group
Practical Law Legal Update 7-505-9930 (Approx. 3 pages)
Supreme Court rules that a company whose shares are secured in favour of a lender may no longer form part of the corporate group
by Rebecca Oliver, Norton Rose
| Published on 05 May 2011 • United Kingdom |
This article is part of the PLC Global Finance April 2011 e-mail update for the United Kingdom.
Speedread
On 6 April 2011, the Supreme Court upheld the decision on the appeal from the Court of Appeal in the case of Enviroco Ltd v Farstad Supply A/S [2011] UKSC 16. Dismissing the appeal, the Supreme Court agreed with the Court of Appeal that when a shareholder transferred its shares in its subsidiary to a lender in connection with the taking of security and the lender entered its (or its nominee's) name in the register of members, that company then ceased to be a subsidiary of the holding company within the meaning of section 736(1)(c) of the Companies Act 1985 (now replaced by section 1159(1)(c) of the Companies Act 2006 but without change in form).
On 6 April 2011 the Supreme Court handed down its decision on the appeal from the Court of Appeal in the case of Enviroco Ltd v Farstad Supply A/S [2011] UKSC 16.
The Supreme Court dismissing the appeal, has supported the findings of the Court of Appeal, in December 2009, that when a shareholder transferred its shares in its subsidiary (Enviroco) to a lender in connection with the taking of security and the lender entered its (or its nominee's) name in the register of members, Enviroco ceased to be a subsidiary of the holding company within the meaning of section 736(1)(c) of the Companies Act 1985 (now replaced by section 1159(1)(c) of the Companies Act 2006 but without change in form).
As a matter of English law, shares in an English company are generally secured to a lender by way of a charge which does not require outright transfer of ownership in the shares. Instead, the lender has a right following a default under the lending arrangements, to sell the shares and take the proceeds to discharge the loan. An English law charge will not have the effect of taking a company outside its corporate group as defined by the Companies Act 2006.
The Enviroco case involved a Scots law share pledge where title to the shares was transferred to the bank at the time the security was created, and the bank was registered as a shareholder in the register of members of the company. Shares in an English company can be also be secured in this by way of share mortgage, although it is uncommon to do so.
Even if a mortgage is granted, so that the lender is the member of record, it is common to leave the voting rights with the security provider until the security becomes enforceable. Where voting rights remain with the security provider, the parent and subsidiary status is preserved, regardless of whether the holding company is also a shareholder in practice.