Exeter City Association Football Club Ltd v Football Conference Ltd and another

APPROVED JUDGMENT

Thursday, 29th January 2004

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:

"1. A party to an arbitration agreement against whom legal proceedings are brought, whether by way of claim or counterclaim, in respect of a matter which under the agreement is to be referred to arbitration, may, upon notice to the other parties in the proceedings, apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter."

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

"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."

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:

"Agreement to arbitration:

(A): Subject to Rule K(1)(b) below, any dispute or difference ("a dispute") between any two or more participants (which shall include for the purposes of this section of the Rules the Association), including but not limited to a dispute arising out of or in connection with, including any question regarding the validity of (i) the rules or regulations of the Association; (ii)...