Ceasing To Be A Subsidiary

In Enviroco Ltd v Farstad Supply A/S [2009] EWCA Civ 1399, the Court of Appeal concluded that, in certain circumstances, a company which is a subsidiary of a holding company may cease to be a subsidiary following the grant of security over shares in the subsidiary by its holding company to a bank.

The result may seem surprising at first and may cause lenders to be concerned about the risk of the company whose shares are charged becoming a subsidiary of the secured lender. The decision is, however, applicable only to a limited range of circumstances and, as explained below, there should not be a risk for the lender in most situations.

The case concerned the vessel M.V. Far Service which was chartered by Farstad to Asco UK Limited, a subsidiary of ASCO plc. Enviroco was engaged to clean the vessel including its oil tanks. During the operation, oil from the tanks caught fire, resulting in the death of an Enviroco employee and damage to the vessel.