Exeter City AFC Ltd v The Football Conference Ltd & Anor

This is an application by the First Respondent, The Football Conference Limited [which I shall call "Conference"] to stay a petition under section 459 of the Companies Act presented by Exeter City AFC Limited [which I shall call "Exeter"].

The application seeks either a compulsory stay of the petition under section 9 of the Arbitration Act 1996 or a discretionary stay under the inherent jurisdiction of the court on the ground that the parties are bound by an arbitration agreement in the rules of the Football Association and/or dispute resolution provisions in the rules of Conference.

At the end of the hearing on 16th January 2004 I said that I would dismiss the application, and I now give my reasons for reaching that conclusion.

The Football Association [which I shall call "the Association"] is the governing body for football in England, and all professional clubs, including Exeter, are members of the Association. The competitions between clubs are organised in a number of leagues under the auspices of the Association. The top three leagues are the FA Premier League; the Football League, divided into three divisions; and the Nationwide Conference. Each of these leagues is run by a separate company, incorporated by guarantee, in which the competing clubs are members. Conference is responsible for the Nationwide Conference league. Exeter was relegated from the third division of the Football League in the 2002/3 season and at the 2003 AGM it became a member of Conference and has since competed in the Nationwide Conference.

For a number of reasons, Exeter has been in financial difficulties for the last year and it sought professional insolvency advice in May 2003. A new board of directors was appointed on 19th May 2003 and they decided to apply for a creditors' voluntary arrangement. A moratorium was granted by the court on 19th September. The proposals were approved at the statutory meetings and since 16th October 2003 Exeter has been subject to a CVA.

It was a feature of the proposals that certain creditors, called "football creditors", totalling approximately £450,000 were, for reasons which I will explain later, to be paid in full over five years, unlike the general body of creditors who would only get 10 pence in the pound.

On 14th November 2003 the Inland Revenue made a revocation application on the ground that the terms for payment in full of certain creditors unfairly prejudiced the Inland Revenue, which had lost its status as a preferential creditor on 15th September 2003 when the Enterprise Act 2002 came into force. It is the imminence of the revocation application that has caused Exeter to present the section 459 petition.

The reason for including the discriminatory provision in the CVA was that under Article 5(3)(d) of the Articles of Association of Conference, a club that enters into a CVA has to inform Conference's secretary immediately and is liable to expulsion from Conference's Football League competition. Expulsion would result in Exeter ceasing to be a member of Conference, since only clubs taking part in the competition can be members. It would also effectively bring to an end Exeter's attempt to survive.

The Conference directors have a discretion under Article 5(3)(d) to allow a club to retain membership. Exeter's case is that the Association and the leagues which it supervises, including Conference, have a policy to exercise that discretion in favour of the club if, and only if, it can establish that certain creditors, called "football creditors", will be paid in full. In the accountancy profession this practice has become known as the "super-creditor rule" and its validity has been the subject of debate. The Association has a similar rule, and the chief executive of Conference says that the Association required Conference to adopt this rule in 2001. He says that the Association has insisted that the rule is justified by what he calls "fundamental sporting imperatives". This is likely to be a crucial issue on the petition.

To reinforce the super creditor rule, Conference at a meeting on 7th June 2003 purported to adopt a change incorporating a new Rule 2(h), providing for a 12 point deduction from the sporting record of any club that enters into a CVA but remains in the competition. The directors have a discretion to amend the sanction to be consistent with other football competitions. The effect of this sanction is also likely to be an issue in the petition.

Exeter therefore finds itself in an invidious position: compelled by Conference and the Association to favour a particular set of creditors, but at risk of having its CVA revoked by the Inland Revenue's insistence on equal treatment. The way it has chosen to resolve the problem is to present a section 459 petition alleging that the affairs of Conference are being conducted in a manner which is unfairly prejudicial to Exeter. A similar course was taken by a sports club, unsuccessfully, in the High Court of Australia in Wade v The New South Wales Rugby League Limited [1985] ALR 225.

I can now turn to the present application to stay the petition. Section 9 of the Arbitration Act provides:

Subsections 2 and 3 are not relevant, but subsection 4 is:

There is also inherent jurisdiction in the court to stay proceedings where there is a more suitable alternative means of resolving the dispute.

The provisions on which Conference relies are first to be found in the rules of the Association, by which both Conference and Exeter, as members of the Association, have agreed to be bound. The relevant rule is Rule K which I shall read, with two typographical errors corrected:

Secondly, Conference relies on Rule 15 of its own rules, by which Exeter as a member is bound:

I can deal with some matters of construction quite briefly. Association Rule K is, in my judgment, an arbitration agreement within section 9, but Conference Rule 15 is not. Rule 15 is not an agreement to refer disputes to an independent body but a provision for internal resolution of disputes, and the possibility of an appeal on limited grounds to the Football Association does not, in my judgment, remedy the deficiency or convert the process into an arbitration agreement.

Secondly, Association Rule K does, in my judgment, cover disputes relating to the Articles of Association of Conference. The words "any dispute or difference" are very wide, and although Articles of Association are not mentioned in the examples given, those are examples only and do not limit the generality of the preceding words.

Thirdly, a dispute about the Rules of Conference does fall within Rule 15. It is therefore excepted by the words of K(1)(b), and the arbitration agreement in K(1)(a) does not apply to it. It follows that if the dispute in the section 459 petition is not decided by the court and there is no further agreement, then part of it would fall to be determined by arbitration under K(1)(a) and part by the directors of Conference, subject to appeal under Rule 15. That does not seem to me to be a satisfactory procedure, and partly for that reason and partly because I would not regard the directors of Conference as a preferable first instance tribunal to the court, I would not be minded to exercise any discretion I may have to stay the proceedings generally.

The real question, therefore, is whether I have any discretion and whether section 9 compels a reference to arbitration of at least part of the present dispute. If part has to be referred to arbitration, then there are stronger grounds for exercising a discretion to stay the rest of the proceedings in the expectation that the parties will agree to refer the remainder of the dispute to the same tribunal.

As to section 9, it is common ground that there are some disputes which are not susceptible to arbitration and that section 9 does not apply to such disputes. There is a tension here between reserving matters of public interest to the courts and the public interest in the encouragement of arbitration. In A Best Floor Sanding Party Limited v Skyer Australia Party Limited [1999] VSC 170, Her Honour Judge Warren held that the right of a contributory to apply to the court for a winding-up order could not be limited by agreement and refused to stay a winding-up petition because it did not fall within the scope of the discretionary provisions of section 53 of the Commercial Arbitrations Act 1984.

I find her reasoning compelling and I can see no difference in principle for this purpose between a winding-up petition and a petition under section 459. If the right to petition to wind up conferred on every single shareholder is a condition of incorporation under the Companies Act, then so in my judgment is the right to petition for relief for unfair prejudice. In Re Magi Capital Partners LLP [2003] EWHC 2790 Ch., leading counsel, probably with the Australian authority in mind, conceded that a limited liability partnership was a creature of statute and that it was not possible to exclude the statutory right to apply to have the statutory entity wound up by the court. The Companies Court has jurisdiction to wind up a company or limited liability partnership, and the same court has supervisory powers, designed to give protection to shareholders by enabling them to apply to the court for special relief. In effect, the court controls by statute the creation and extinction of the company, and it also attends to it during midlife crises.

The statutory rights conferred on shareholders to apply for relief at any stage are, in my judgment, inalienable and cannot be diminished or removed by contract or otherwise. I have, however, been referred to two cases where the court has stayed a section 459 petition or a winding-up petition to allow arbitration to take place. The first is Re Vocam (Europe) Limited [1998] BCC 396. That was a decision made by Mr Justice Rimer in the Companies Court on an interim application. It is not clear whether judgment was reserved. Only one case is referred to and the main argument for the petitioner seems to have been that no stay should be granted because the arbitrator could not grant the same relief as the court could under section 461. Mr Justice Rimer rejected that submission and held that the applicant was entitled to a stay under section 9 of the Arbitration Act. The main point taken before me, decided in Australia and conceded in Re Magi Capital Partners does not seem to have been argued. In those circumstances, I feel free not to follow the result of Mr Justice Rimer's decision.

The other case is my decision in Re Magi Capital Partners, to which I have already referred. That case was one of limited partnership, which has some affinity with an ordinary partnership where, as I observed, a stay might have been compulsory under the Arbitration Act. As a matter of discretion, I made an order that certain allegations in the petition which were already the subject of arbitration should be decided by the arbitrator before the petition proceeded. That decision was I think essentially one of case management and I do not think that the same considerations are present in the present case to persuade me to exercise my discretion in favour of a stay.

Counsel for Conference submits that there are discrete issues which either must or should be decided by arbitration under Rule K or the procedure under Rule 15. I do not accept that analysis of the situation and I prefer to apply Occam's razor to the dispute. In this case the dispute between the parties is whether Conference's affairs are being conducted in a manner which is unfairly prejudicial to Exeter's interests. In the course of making a decision on that issue, the tribunal will no doubt have to resolve a number of sub-issues, but I do not think that Rule K, properly construed, applies to those sub-issues. In Ashville Investments IT v Elmer [1989] 1 QB 488 at page 517, Lord Justice Bingham said he would be very slow to attribute to reasonable parties an intention that there should be in any foreseeable eventuality two sets of proceedings.

If, as I think, I have a discretion in the matter, I unhesitatingly prefer not to grant a stay, because the court seems to me the appropriate tribunal to decide both the section 459 petition itself and all related issues. Re Magi was an exceptional case where there were two sets of proceedings already on foot.

For those reasons, I hold that section 9 of the Arbitration Act does not apply, and in my discretion I have chosen to refuse a stay. If costs cannot be agreed, I will hear submissions at some time suitable to both counsel. I will also hear later any submissions as to permission to appeal.