Law Report -Injuctive Relief - Kilroys establish Legal Precedent

MONDAY, 11TH OCTOBER 2000

The Irish Times - Law Report

Edited by Bart D. Day, Barrister, and Agatha Clancy, Barrister Associate Editors: Michael Keogh, Barrister, and Robert Miller, Barrister

Court can grant interim relief pending determination of dispute by arbitration

Telenor Invest AS (plaintiff) v IIU Nominees Limited and Esat Telecom Holdings Limited (defendants).

Company Law - Shareholding agreement - Arbitration - Stay on proceedings - Interim relief - Interlocutory Injunction - Balance of Convenience - Arbitration Act 1954 (No. 26) - Arbitration Act 1980 (No. 7).

The High Court (before Mr. Justice O'Sullivan); judgement delivered 20 July 1999.

The dispute that arose between the parties in relation to the interpretation of the shareholding agreement was one which fell to be determined by arbitration. Notwithstanding that the dispute concerning the agreement was to be determined by arbitration, this did not preclude any of the parties from seeking interim relief from the court pending determination of the dispute.

Mr. Justice O'Sullivan so held in acceding to the first defendant's application for a stay on the plaintiff's proceedings while at the same time granting interim relief to the plaintiff restraining the activities the first defendant in relation to the management of the company in question.

Paul Gallagher SC and Denis McDonald BL for the plaintiff; Richard Nesbitt SC and Martin Hayden BL for the first defendant; Bill Shipsey SC and Lyndon MacCann BL for the second defendant.

MR. JUSTICE O'SULLIVAN outlined the facts of the case. The three parties in the present proceedings were the shareholders in Esat Digifone Limited ("the company"). The agreement in question provided that both the plaintiff and second defendant would contribute £6,000,000 each to the capital of the company with the first defendant agreeing to contribute £3,000,000. The first defendant's initial contribution meant that it was entitled to 20 per cent of the share capital of the company. However over time these figures had altered. The shareholding of both the plaintiff and the second defendant now stood at 49.5 per cent each with the first defendant holding the remaining balance of 1 per cent.

The shareholding agreement provided in Clause 7.4 that "any party shall so long as it holds not less than 10 per cent of the equity share capital be entitled to nominate one person as a director of the company." The plaintiff therefore contended that not only had the first defendant lost the right to nominate any directors, it had also lost the right to maintain its present nominees on the board of the company.

For its part the first defendant disputed this interpretation of the agreement claiming that, in the absence of an explicit provision, there was no onus upon its nominee directors requiring them to resign. The first defendant was itself seeking a stay on the present proceedings. The first defendant maintained that under the shareholding agreement all disputes arising from the agreement fell to be determined by arbitration and was therefore seeking a stay.

Counsel for the plaintiff contended that the court had no jurisdiction to grant a stay on the present proceedings or in the alternative if the court did have jurisdiction to grant a stay this did not preclude it from granting ancillary relief under section 22 (1)(h) of the Arbitration Act 1954. The first defendant on the other hand argued that the court should grant a stay pure and simple and that any further relief granted should only be on the basis of preserving the status quo. The plaintiff also argued that other causes of action were in being against the first defendant which were not subject to arbitration and thus this was a further reason for the court to decline to grant a stay against the present proceedings. The first defendant claimed that such other causes of action that the plaintiff referred to were merely subsidiary to the main dispute i.e. the interpretation of the shareholding agreement and it would be wrong for the plaintiff to avoid the full implications of the arbitration agreement by involving subsidiary matters.

Mr. Justice O'Sullivan held that the agreement in question was an agreement within the meaning of the Arbitration acts 1954 -1980. Mr. Justice O'Sullivan also rejected the contention that he was precluded from granting interim relief under section 22(1)(h) of the Arbitration Act 1954. Mr. Justice O'Sullivan referred to the fact that section 4 of the Arbitration Act 1980 expressly repealed section 12 of the 1954 Act but no such similar provision had been enacted in relation to section 22(1)(h) of the Arbitration Act 1954 and he was not willing to accept the contention that remedies under section 22(1)(h) to provide relief were not available to the Court.

Mr. Justice O'Sullivan was satisfied that there was a substantial question to be tried in relation to the interpretation of Clause 7.4 of the shareholding agreement. Furthermore, he stated that the company in question was active in a growing and dynamic sector of the economy and thus damages could not be said to be an adequate remedy for depriving either one of the parties for a share in the management of such a company. Mr. Justice O'Sullivan considered that the matter must then be determined by reference to the balance of convenience. Mr. Justice O'Sullivan rejected the argument by the first defendant that any order made in favour of the plaintiff would be seen as a criticism of the actions of the nominee directors of the first defendant. Mr. Justice O'Sullivan further added that all sides recognised that the contribution of these directors was beyond question.

Mr. Justice O'Sullivan then referred to the passage in American Cyanamid Co. v Ethicon [1975] AC 396 at pages 408-409 where Lord Diplock referred to the issue of disadvantage that a party might suffer should it not obtain injunctive relief notwithstanding that it might well recover damages later. On this basis Mr. Justice O'Sullivan held that the extent to which the plaintiff would be disadvantaged as a 49.5% shareholder by the failure to obtain relief far outweighed that which might be suffered by the first defendant as a 1 per cent shareholder. Mr. Justice O'Sullivan also stated that the first defendant appeared to hold the balance of percentage share between the plaintiff and the second defendant on the board of directors. Until the dispute between the parties was resolved this would give the first defendant a power wholly disproportionate to the percentage shareholdings of the contesting parties.

In relation to the preliminary issue, Mr. Justice O'Sullivan granted the first defendant a stay on the plaintiff's proceedings in so far as they related to the dispute governing the interpretation of the shareholding agreement.

In relation to the second issue Mr. Justice O'Sullivan granted an interlocutory injunction restraining the first defendant's nominee directors from acting on the board of the company pending resolution of the dispute concerning the interpretation of Clause 7.4 of the shareholding agreement.

Solicitors: KILROYS (Dublin) for the plaintiff;
William Fry (Dublin) for the first and second defendants.

Robert Forde
Barrister

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