The Viewpoint: How to resolve any conflict between the Arbitration Act 1996 and the Companies Act 2006

Bar & Bench November 20 2017
Zaiwalla & Co. Interpol notices

How the resolution of any conflict between the (English) Arbitration Act 1996 and the Companies Act 2006 can assist in the application of section 8 of the (Indian) Arbitration and Conciliation Act 1996 as amended.

Lawrence Jacobson

In broad terms, s8 of the (Indian) Arbitration and Conciliation Act 1996, as amended, appears to have a similar mandatory effect to that of s9 (read together with s4[1]) of the Arbitration Act 1996 (the “Act”)[2] Act. Accordingly, it is hoped that the methods and analysis briefly mentioned below, may be of some assistance to our Indian colleagues.

In a relatively recent decision of a County Court in England[3] it was held, among other things, rejecting the Defendant’s application for a stay under s9 of the of the Respondent’s claim for audited accounts under s476 of the Companies Act 2006, that a shareholder who might have been entitled to audited accounts under an arbitration agreement was also entitled to audited accounts outside the parameters of the arbitration agreement under s476.

The decision of that court, while not binding because it is not a court of record, nevertheless may be of persuasive authority in any future proceedings on an application for a stay concerning matters provided for in an arbitration agreement. Furthermore, the decision may influence the determination of any court as to whether s 9 of the Act has primacy over the statutory rights of any counterparty to an arbitration agreement.

So far as material for the purposes of examining the cogency and efficacy of the County Court decision, the facts of the case are that the Claimant and the Defendant compromised legal proceedings, in which the Claimant had claimed damages based on the alleged market value of his shares in the Defendant Company. Previously, the Claimant had also made various requests for audited accounts to the Defendant Company under s476 of the Companies Act 2006. No reasons are prescribed by statute for which any qualifying shareholder might make a request to a company.

The Settlement Agreement provided, among other things, that the mechanism for the valuation of the Claimant’s shares would be referred to an arbitrator for determination. It was further provided that once the shares had been valued in accordance with the terms of the agreement the Claimant, forthwith would transfer his shares to a named third party on payment of the valuation price. The parties failed to agree or to refer the matter to arbitration and the Claimant issued proceedings to enforce his request for audited accounts. In response the Defendant issued an application under s9 to stay those proceedings in order to give effect to the arbitration clause in the Settlement Agreement. The Defendant reasoned that it was highly likely that in determining the mechanism of valuation, the arbitrator might well direct the preparation of audited accounts. In the circumstances, the Defendant formed the view that the Claimant’s claim related in whole or in part to a referred matter in the arbitration.

The Judgment comprised, among other things, the following primary finding:

The arbitration clause in the Settlement Agreement was not sufficiently widely drafted so as to exclude the Claimant’s right to bring the proceedings under s476.

To what extent is the Judgment consonant with authority?

The Court of Appeal in Fulham Football Club (1987) Ltd v Richards[4] found that there were no express provisions in either the Act or the Companies Act 2006 which excluded arbitration as a possible means of determining disputes involving unfair prejudice to members of a company (s994 of the Companies Act 2006). Precisely the same can be said of matters under s476. Furthermore, it held that the Act clearly gave primacy to rights under an arbitration agreement by making a stay of court proceedings relating to the same dispute mandatory.[5] The Court of Appeal went on to state that:”…the combined effect of an arbitration agreement which covers the dispute and section 9(4) of the [Act] is that the agreement to refer the dispute to arbitration will exclude the parties’ right to bring or continue legal proceedings covering the same subject matter unless one of the exceptions contained in section 9(4) is established..”[6] Fulham Football Club is therefore authority for the proposition that where the arbitration agreement covers the dispute, s9 has primacy over ss994 and 476 of the Companies Act 2006.

Moreover, an arbitration agreement remains binding and effective even if the parties agree to refer to arbitration only certain disputes that might arise from their relationship.[7]

The legal proceedings, as a whole, may be “in respect of “a referred matter although those proceedings concern both that and other matters. In those circumstances, the whole proceedings may need to be stayed if it cannot be determined without consideration of the referred parts.[8]

While it was accepted in the Judgment, that, objectively, one of the primary functions of the audited accounts was that it could be used in connection with the mechanism for valuation, it failed to take into account that such a purpose could not be severed from those functions unrelated to the arbitration agreement. In failing to do so, the Court may well have erred in fact and in law in not giving primacy to s9 of the Act over s476 of the Companies Act 2006 as in Fulham Football Club. It is therefore unlikely that this Judgment will be followed.

As none of the exceptions in s9(4) was relevant, the Court, as expressly required by Parliament, firstly ought to have granted an immediate stay of the legal proceedings while the issue was referred to an arbitral tribunal and then secondly to have resumed the proceedings when the issue had been resolved in accordance with the parties’ agreement.[9]

[1] S9 has mandatory effect notwithstanding any agreement to the contrary.

[2] “9(1) 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 may ….apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter….(4) On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed….”.

[3] Rene Herzfeld (Claimant) v Morton Medical Ltd (Defendant) (13 May 2016)

[4] [2012] Ch 333 CA @341 [para.28]

[5] Ibid @341 [para.31]

[6] Ibid @345 [para.42]

[7] Lombard North Central Plc v GATX Group [2012] EWHC 1067 @6 [para.16]

[8] Ibid [paras.13(i) and 16]

[9] Ibid [para.16]

Lawrence Jacobson, In-house Barrister, at Zaiwalla & Co. LLP

[Zaiwalla & Co. LLP is an International Solicitors firm based in London. Lawrence Jacobson has more than 25 years of experience in private practice at the Bar.]  

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