J&W Sanderson Ltd v Fenox (UK) Ltd & Ors

I have before me an application by the Third Respondent to this petition (“Mr Arbuzov”), supported by the Second Respondent (“Fenox GmbH”) to join an additional party as the Sixth Respondent (“Mr Vaganov”), to serve the proceedings on him out of the jurisdiction and to stay the petition. The application for joinder is not pursued as the central application is for a stay and it is accepted that it will make no difference to the outcome of that application whether the additional party is joined or not.

The background to the application is as follows. The petition is brought by a company called J&W Sanderson Ltd (“the Petitioner”) for relief in respect of the Company, Fenox (UK) Limited, of which the Petitioner is a 50% shareholder. Fenox GmbH is the only other shareholder. The Company’s principal business is to hold some 602,806 shares in a subsidiary, JV Unison CJSC (“Unison”), representing (it is alleged in the petition) about 60.28% of its issued share capital. Unison is a company incorporated under the law of Belarus. The Petitioner alleges that the Company has no directors and that the shareholders cannot agree on the appointment of new directors so that there is deadlock in the Company’s management. The Petitioner further alleges that at different times notices have been filed at Companies House indicating that two individuals (Mr Burgess and Mr Khrystsich) had been appointed as directors of the Company, though neither had in fact been validly appointed. Mr Burgess, as purported director, had then executed powers of attorney in favour of two other individuals, Mr Putitski and Mr Arbuzov, to enable a sale to take place of 517,551 of the Company’s shares in Unison to a company controlled by Mr Arbuzov. Injunctions are sought against Mr Arbuzov and Mr Putitski (as attorneys under these purported deeds) and Mr Khrystsich (as a purported director) to restrain them from acting on the Company’s behalf; they have therefore been joined to the petition as the Third, Fourth and Fifth Respondents respectively. Interim injunctions were granted against them by Registrar Baister on 6 May 2014. Mr Burgess has purportedly now resigned as a director and no relief is sought against him.

Fenox GmbH has served Points of Defence in which it denies the central allegations and raises a number of factual allegations which will need to be resolved at a trial. In summary, the allegations are as follows.

Fenox GmbH traces the ultimate origins of this dispute to a Partnership Agreement made on or about 1 December 2002 between Mr Vaganov and Mr Arbuzov. At that time (so it is alleged) Mr Vaganov owned or controlled about 74% of the issued share capital of Unison, partly through the Petitioner (which owned 602,806 shares in Unison, carrying 60.28% of the voting rights) and partly through a Belarus company called Lada OMS Holdings CJSC (“Lada”) (which owned 137,214 shares in Unison, carrying 13.82%). The agreement was to the effect that Mr Vaganov would bring his (indirect) interest into the partnership, with Mr Arbuzov introducing cash or plant and machinery of equivalent value, and thereafter the partners would own that interest equally. Unison ran a car assembly plant in Minsk, originally established as a joint venture between the Belarus government and Ford Motors. The Belarus government remains interested as Unison’s main other shareholder.

It is alleged in the Points of Defence that the Company was set up to hold the partnership’s interest in Unison, the Company’s shareholders (the Petitioner and Fenox GmbH) being the corporate vehicles of the partners, Mr Vaganov and Mr Arbuzov respectively. However, in breach of the Partnership Agreement, Mr Vaganov only procured that the Petitioner’s shares in Unison were transferred to the Company and he continued to retain control of Lada’s shares in Unison. It is further alleged that it was Mr Vaganov who tried to interfere with the Company’s operations by having himself notified to Companies House as director of the Company in May 2009 when no such appointment had been made and even though the Company had hitherto been run, with the consent of the partners, by persons connected with Mr Arbuzov, including Mr Putitski.

It is further alleged that Mr Vaganov had earlier, in November 2007, concluded a memorandum of understanding with Iran Khodro Industrial Group (“Iran Khodro”) by which Iran Khodro was to subscribe for shares in Unison giving it a 42.1% interest in the voting rights, with the Belarus government and Lada maintaining their proportionate interests and the Company’s being reduced to 23%. In making this arrangement, Mr Vaganov was acting as the Chairman of Unison and (it is alleged) in breach of the Partnership Agreement. Iran Khodro and the Belarus government subscribed for new shares accordingly, although Lada did not. In November 2011, the Company, acting by Mr Putitski with the knowledge and consent of both Mr Vaganov and Mr Arbuzov, applied to the Economic Court of the City of Minsk for the annulment of the issue of shares to Iran Khodro. Lada supported that application initially but later dropped out of the proceedings. The Company’s proceedings were successful in that, on 21 June 2012, the Appeal Court in Belarus cancelled the shares issued to Iran Khodro, though not those issued to the Belarus government. The voting rights in Unison’s share capital are now therefore controlled by the Belarus government as to 47%, the Company as to 42%, Lada as to 9% and certain officers of Unison as to 2%.

Lada then started proceedings of its own in the Economic Court of the City of Minsk in September 2013. These were supported by the Petitioner. The relief sought was the transfer to Lada of all the Company’s shares in Unison on the footing that the share transfer to the Company in 2004 pursuant to the Partnership Agreement had taken place in breach of Lada’s rights of preemption under Unison’s Articles of Association. The claim was defended by the Company, acting (apparently without complaint from Mr Vaganov) through Mr Putitski, and it was dismissed by the court as “frivolous” on 21 November 2013. An appeal by Lada to the Appeal Court was dismissed on 14 January 2014.

It is clear from this summary of the allegations, fleshed out in the evidence on this application, that the dispute between Mr Vaganov and Mr Arbuzov has a long history and several different aspects. Both partners, or former partners, are competing to achieve an advantage over the other in their continuing involvement in the business of Unison; litigation (including this petition) is part of that battle. Any advantage to be gained depends also on how each of the partners is viewed by the Belarus government from time to time (the evidence suggests that currently Mr Arbuzov is in greater favour in those quarters, though doubtless Mr Vaganov will seek to challenge that). Consequently, it is important to note that the “preferred remedy” sought by the Petitioner in this petition is not the injunction sought against the three individuals who are said to have been exercising power over the Company’s affairs, nor the winding up of the Company on the just and equitable ground, but an order that the Company’s shares in Unison be transferred to the Company’s shareholders equally. If, as Fenox GmbH and Mr Arbuzov maintain, the Partnership Agreement remains in force, a central issue at trial will be whether this relief could be an appropriate exercise of the court’s discretion, even assuming (which is also in dispute) that the Petitioner proves that the Company is deadlocked and that Mr Arbuzov had sought to manipulate its management without the Petitioner’s knowledge and consent in the manner pleaded.

In these circumstances, Mr Arbuzov (with the support of Fenox GmbH) applies for the proceedings to be stayed pending determination of the wider dispute between Mr Vaganov and Mr Arbuzov by arbitration. The Partnership Agreement contains an express provision (clause 9.1) requiring all disputes between the partners to be the subject of arbitration in Russia. On this basis it is contended that, as between the partners, a stay should be granted as of right, pursuant to section 9 of the Arbitration Act 1996. Alternatively, and in any case as regards the issues between the other parties, it is contended that the court should exercise its discretion to stay the proceedings because the real dispute is between Mr Arbuzov and Mr Vaganov under the Partnership Agreement and, until that is resolved, the appropriate relief on this petition will not become apparent. Arbitration, it is said, would enable the whole dispute to be dealt with justly, not just that aspect of it which involves the Company; and it would be undesirable for different sets of proceedings (arbitration and petition) to be in progress in different jurisdictions at the same time, with all the risks of duplication of cost and inconsistency of findings that that would entail. Moreover, it is said, Russia must be a more convenient jurisdiction for the principal parties to resolve their differences given that the applicable law, material documentation and likely witnesses are all Russian; the English connection is incidental and purely technical.

In my judgment, there is no case for a stay as of right pursuant to section 9 of the Arbitration Act 1996. This is a company petition to which the original parties were the Petitioner and Fenox GmbH (as sole equal shareholders) and the Company itself. None of these is a party to the Partnership Agreement or any other arbitration agreement. Mr Arbuzov has been added as an additional Respondent (along with Mr Putitski and Mr Khrystsich) but that was to enable the Petitioner to seek effective injunctions restraining those individuals from acting on behalf of the Company; their joinder was not needed for the Petitioner to pursue its “preferred remedy” of distribution in specie of the Unison shares or, for that matter, a just and equitable winding up. In any case, the joinder of Mr Arbuzov does not entitle him (let alone Fenox GmbH) to seek a stay under section 9 against the Petitioner, which was not a party to the arbitration agreement. As Lawrence Collins LJ explained in Mayor andCommonalty and Citizens of the City of London v Sancheti [2008] EWCA Civ 1283

“I have no doubt that section 9 cannot apply if the parties to the court proceedings are not the parties (or persons claiming through or under a party: section 82(2)) to the arbitration agreement. It would be wholly inconsistent with the purpose and structure of the 1996 Act in general, and of section 9 in particular, if a stay could be obtained against a claimant who was not a party to the arbitration agreement. The fact that section 9 refers only to a “party to an arbitration agreement against whom legal proceedings are brought... in respect of a matter which under the agreement is to be referred to arbitration” does not obviate the need for the claimant also to be a party. It is not sufficient that there simply be a “matter” which is to be referred to arbitration” (para 29).

Section 82(2) does not assist Mr Arbuzov or Fenox GmbH. The Petitioner’s claim is brought in its own right as a registered shareholder in the Company for relief afforded to shareholders by English statute: the Petitioner is not therefore bringing its claim, or any part of its claim, “under or through a party to the [arbitration] agreement”. The fact that the Petitioner may be controlled by Mr Vaganov is irrelevant since a connection of this kind is not sufficient to bind the Petitioner to the arbitration agreement (see the discussion in Sancheti at paras [30] to [34]).

This difficulty would not be overcome even by joining Mr Vaganov as a party. Mr Vaganov will not be the “claimant” in the proceedings so the requirement identified in Sancheti “for the claimant also to be a party [to the arbitration agreement]” will still not be met. Mr Vaganov’s joinder would not therefore assist the argument under section 9.

Fenox GmbH’s application for a stay is not, however, confined to section 9. A separate power to order a stay derives from the court’s inherent jurisdiction or its case management powers. I have been taken to the decision of the Court of Appeal in Reichhold Norway ASA v Goldman Sachs International [2000] 1 WLR 173. There, a claim was brought in England against the Defendants for negligent misstatement in the course of negotiations for the purchase by the Plaintiffs of a company from the Defendants’ principal; separately, the Plaintiffs commenced an arbitration in Norway against the Defendants’ principal for breach of warranty. Moore-Bick J ordered a stay of the English proceedings pending determination of the arbitration in Norway and the Court of Appeal upheld that order, though observing that “stays are only granted in cases of this kind in rare and compelling circumstances” (p 186C per Lord Bingham of Cornhill CJ). The judge had reached his decision after a careful review and assessment of “the interrelationship between the arbitration proceedings and the court proceedings” (pl81C of the Court of Appeal report) and all other factors relevant to his decision, including the relative “cost and convenience” of ordering or refusing a stay and “the interest of justice generally” (see p183A).

The problem for Fenox GmbH on its current application is the absence of any material upon which I could carry out the sort of assessment undertaken by Moore-Bick J in Reichhold. There are no arbitration proceedings currently in progress between Mr Arbuzov and Mr Vaganov pursuant to the arbitration agreement, nor is there any description of what issues Mr Arbuzov might wish and be able to raise in that context nor therefore any opportunity to consider the interrelationship of those issues with the issues arising in this petition; nor is there any evidence as to how and how quickly the issues might be resolved (all I have is a brief description of the arbitral tribunal which would be involved - see para 10 of Mr Arbuzov’s second statement). Fenox GmbH and Mr Arbuzov have belatedly (at the hearing) offered an undertaking that Mr Arbuzov will commence an arbitration within 28 days and I take that into consideration. But the undertaking offered does not clarify what issues will be raised nor what relief will be sought and it remains wholly unclear to me how effective any such proceedings will be compared to the proceedings now before this Court. In the latter respect, I note that Mr Vaganov has indicated that he will want to challenge any reference to arbitration, on the grounds that the parties to the Partnership Agreement have for many years regarded their agreement and any arbitration agreement as terminated (though it has to be said that Mr Vaganov’s evidence in these proceedings appears to be founded in several places on an allegation that the agreement remains in force). It is perfectly possible therefore that any reference to arbitration will become bogged down in preliminary skirmishes as to the tribunal’s jurisdiction. The current petition has no such procedural disadvantages.

While I can see plenty of scope for the allegations of breach of the Partnership Agreement I have summarised above to be referred to arbitration and while a decision of the arbitral tribunal as between Mr Arbuzov and Mr Vaganov may theoretically help to resolve issues in these proceedings (including the crucial issue of whether or not the Court should grant the Petitioner its “preferred remedy”), I find it impossible at this stage to carry out any meaningful assessment of the interrelationship between the arbitration proceedings and the court proceedings or of the other factors considered in Reichhold such as the relative cost and convenience of ordering or refusing a stay and the interest of justice generally.

Against a stay is the fact that the current petition is a perfectly acceptable vehicle for the determination of the issues which the Petitioner and Fenox GmbH have each sought to raise (by the petition and the Points of Defence respectively), even if those parties’ operations are only part of the commercial arrangements by which Mr Vaganov and Mr Arbuzov have conducted their wider affairs pursuant to the Partnership Agreement. Where partners directly or indirectly operate through an English company, there can hardly be anyobjection to proceedings invoking statutory remedies available to its shareholders under English law. That is simply the consequence of Mr Arbuzov and Mr Vaganov using an English company, owned by separate corporate vehicles, to hold the partnership assets. The English court in proceedings of this kind will take account of any underlying partnership or quasi-partnership relationships and expectations, if proved to it by sufficient evidence, and, if the allegations in the petition are made out, any remedy will be fashioned accordingly. This is not therefore a case like Reichhold where the judge commented, for example, that

“... it is not easy to see why Reichhold should wish to pursue these proceedings in preference to the arbitration” (p181B)

and

“there is little of a positive nature to be said against granting a stay” (p182E).

These are proceedings between corporate shareholders of an English company as to its future under English law, a petition being the natural vehicle for the resolution of that dispute. Without a compelling reason to order a stay, I decline to do so.