What expenditure falls within ‘ordinary and proper course of business’ exception in freezing orders?

The cost of pursuing related arbitration proceedings and fighting extradition proceedings could be costs incurred in the ‘ordinary and proper course of business’ according to the Court of Appeal in Koza Ltd v Koza Altin.(1)

Underlying facts

The parties are in dispute over the control of the first claimant Koza Ltd. In 2015 the directors of various related companies within the Koza group, including Kozin Altin (the first defendant and Koza Ltd's parent), were replaced by trustees appointed by the Turkish state. Koza Ltd and Mr Ipek (one of Koza Ltd's directors) applied for declarations that the notices served by Koza Altin under the Companies Act 2006 to convene a meeting of Koza Ltd to pass resolutions replacing the directors were ineffective. They also applied for an injunction to restrain the defendants from holding any meetings of Koza Ltd, pursuant to the notices. The injunction was granted subject to Koza Ltd providing an undertaking to the court not to "dispose of, deal with or diminish the value of any funds belonging to [it] or held to [its] order other than in the ordinary and proper course of its business".

Koza Ltd intended the following expenditure:

• funding Ipek Investment Ltd (IIL) to bring arbitration proceedings against Turkey before the International Centre for the Settlement of Investment Disputes (ICSID), which was aimed at establishing that IIL became the ultimate holding company of the Koza group in 2015, pursuant to a share purchase agreement; and
• funding Mr Ipek in resisting extradition from the United Kingdom to Turkey on various charges relating to subverting the Turkish government.

Koza Ltd argued that the expenditure would be in the ordinary and proper course of its business and therefore permitted by the undertaking because:

• the arbitration proceedings would assist it in regaining control of its sources of funds from the Koza group and preventing the seizure of assets by Turkey; and
• Mr Ipek was vital to the ongoing operation of Koza Ltd and, as such, it was important to the company that he was not extradited to Turkey.

At first instance, the court held that the proposed expenditure was not permitted and made negative declarations to that effect, primarily on the basis that:

• it was unclear whether ICSID had jurisdiction to hear the proposed arbitration claim (the court also found that there were serious doubts about the authenticity of the share purchase agreement underlying the proposed claim); and
• Mr Ipek could fund the extradition expenditure from his own resources, which meant that the expenditure could not be 'proper' (even if it was 'ordinary').

Court of Appeal explores 'ordinary' and 'proper'

The Court of Appeal summarised the authorities relating to the meaning of an 'ordinary' and 'proper' course of business (mostly in the context of freezing injunctions). The relevant guidance is:

• whether a transaction is in the ordinary and proper course of business is a mixed question of fact and law;
• 'ordinary' and 'proper' are separate, cumulative requirements;
• the test is objective and must be considered against accepted commercial standards and practices;
• the question is not whether a transaction is ordinary and proper, but whether it is carried out in the ordinary and proper course of a company's business; and
• the questions must be answered in the specific factual context in which they arise.

Arbitration expenditure

The Court of Appeal discharged the negative declaration but declined to make the positive declaration sought by Koza Ltd. It held that:

• while there was a seriously arguable case that the share purchase agreement had been a forgery, it was impossible for the court to declare in advance that the expenditure would be in the ordinary and proper course of Koza Ltd's business;
• it was not the court's role to determine whether ICSID had jurisdiction to hear the claim. Unless the proposed arbitration's prospects were "so manifestly poor that they throw doubt on the board's motive in pursuing it" – they had no relevance as to whether funding the claim would be in the ordinary and proper course of Koza Ltd's business;
• Koza Ltd would be "funding the litigation because it considers that doing so will facilitate the continuation of the ordinary and proper course of its mining business"; and
• the absence of evidence as to whether IIL had access to alternative sources of funding was not relevant (although the Court of Appeal declined to lay down a rigid rule that it could never be relevant in this sort of case).

If Koza Ltd incurred the expenditure it would therefore do so at its own risk (ie, it would ultimately be shown to be in breach of its undertaking).

Extradition expenditure

The Court of Appeal granted a declaration that the extradition expenditure would be in the ordinary and proper course of Koza Ltd's business:

• The question as to whether Mr Ipek could fund this himself was not relevant. Mr Ipek was a vital asset of Koza Ltd; the fact that he might pay himself did not make payment by Koza Ltd outside the proper course of its business (even if it might make it uncommercial or imprudent).
• The expenditure did not amount to litigation funding. Its purpose was to protect Koza Ltd's mining interests and therefore was not a departure from the ordinary course of its business. The fact that the benefit to Koza Ltd would be indirect was irrelevant.

Comment

Many practitioners will be familiar with the 'ordinary and proper course of business' exception from the standard form freezing order. This guidance provides a further, useful example of the application of that difficult test. Its application by the Court of Appeal to the extradition expenditure is perhaps more permissive than might be expected, given the court's recognition that this expenditure was potentially uncommercial. This demonstrates that, consistent with the fact that the purpose of a freezing order should not be to stifle the respondent's business, the court will be slow to substitute its decision making about transactions for that of the respondent.

In terms of the arbitration expenditure, the decision illustrates that where the proposed expenditure or transaction is complex the court may not be in a position to make the factual findings necessary for it to authorise the expenditure in advance, meaning that if the respondent wishes to proceed it must do so at a risk of breaching the order (and, typically, in contempt of court as a result). While the outcome in the present case seems fair (given that Koza Ltd or the Ipek family would presumably know whether the share purchase agreement had been a forgery), in other cases respondents (and their advisers) will inevitably be left in a difficult position.

(1) [2019] EWCA Civ 891.