Corporate finance update - May 2011

Taylor&Emmet’s Corporate team recently advised on the disposal of Abacon Limited to Bibielle (UK) Limited.

The legal work was led by Peter Crawford and Lisa Wallis, with support from Taylor & Emmet’s Commercial Property and Employment teams.

Abacon was established in 1986 and are one of the leading coated abrasive converters in the United Kingdom.

Peter Crawford explained: “Abacon is an important player within its industry sector. Their knowledge, experience and customer base ensued that they were an ideal acquisition target and I am certain that the business will go from strength to strength as part of the Bibielle group”.

Briefcase News

What counts as a ‘subsidiary’?

In the recent case of Enviroco Ltd v Farstad Supply A/S the Supreme Court considered what is meant by ‘subsidiary’ in the Companies Act 1985 (and Companies Act 2006).

In this case Enviroco Ltd claimed the benefit of an indemnity in respect of damage to a vessel. The initial indemnity was in favour of another company (“Company C”), but Enviroco Ltd claimed it also applied to them as the contract stated the indemnity was in favour of Company C and ‘its affiliates’. Company C and Enviroco Ltd were connected as they were both subsidiaries of the same parent company. In the contract the definition of ‘affiliate’ included subsidiary companies, and the definition of ‘subsidiary’ was that set out in s736 of the Companies Act 1985.

The issue in this case was that the parent company had granted security over the shares in Eviroco Ltd to a bank, and the shares had been registered in the name of the bank’s nominee. The legislation makes it clear that a ‘member’ is the person whose name is on the register. As the name on the register was that of the bank’s nominee, then the parent company was not held to be a member of Enviroco Ltd. Accordingly, Enviroco Ltd was not a subsidiary and was not in a position to benefit from the indemnity.

It is rare for the legal title of shares to be transferred to a lender, but if a lender were to require such a transfer then companies and lenders should consider what contracts, finance documents or arrangements they may have which would be affected by a subsidiary falling outside of the statutory definition.

Retention of title clause enforceable?

In the current financial climate it is usual for companies to try and build as much protection as possible into supply chains, so that they are able to reclaim goods sold if the buying company becomes insolvent.

This is generally achieved by including a retention of title clause in the contract so that title to the goods stays with the seller until the buyer has paid the full purchase price. If the buyer were to become insolvent before they have paid for the goods, then the seller can enter the buyer’s premises and reclaim goods which have not been fully paid for.

To try and increase protection for the seller it has become popular to include an ‘all monies’ clause. This means the seller retains title to the goods until they have received all monies which may be owing to them from the buyer under all arrangements – not just the monies owing in respect of those particular goods.

However in the recent case of Sanddu (t/a Isher Fashions UK) v Jet Star Retail Ltd (t/a Mark one) (In Administration) the mercantile court determined the supplier had no claim under such a clause. In this case the parties had an ongoing contractual arrangement to supply clothing stock. The court indicated that such clauses may not be enforceable if the relationship between the parties involves rolling stock, as it is not practical for the buyer to discharge all monies before selling the stock on. The clause will be contradictory to the nature of the contractual arrangement and therefore unenforceable.

If a retention of title clause is to be used in a contract, care should be taken to ensure that it accurately reflects the overall commercial arrangement between the parties.