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High Court provides guidance on the meaning of the words “in the ordinary and proper course of business”

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management - Other

11-02-2018

Koza Ltd & Anor v Mustafa Akcil & Ors [2017] EWHC 2889 (Ch)

Facts of the case

– a dispute arose between the parties over the management and control of Koza Limited (“Koza”). In the context of proceedings before the High Court, Koza voluntarily provided an undertaking 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 business” (the “Undertaking”)

– Koza subsequently applied for a declaration that payments for the following would fall within the Undertaking:

– a proposed arbitration to be brought by Koza’s parent company

– the retention of a PR firm

– the salary of its CEO

– alternatively, Koza applied to vary the Undertaking to permit such expenditure

The decision

– Deputy Judge Richard Spearman QC considered the case law on the interpretation of the words “in the ordinary and proper course of business”, including in the context of insolvency, floating charges and freezing orders. He held that: 

– although the arbitration, if successful, would benefit Koza as well as its parent company, the payments did not fall within the Undertaking because (i) there were serious doubts about the authenticity of the arrangement pursuant to which the parent company purportedly became the parent and (ii) whether the payment was being made in breach of fiduciary duty

– while it was accepted that the payments to the PR firm might benefit a director of Koza as well as Koza itself, to incur expense in defending or promoting the reputation of a director would not necessarily be an improper use of Koza’s resources. Such payment was therefore within the Undertaking

– the payment of the CEO’s salary was within the Undertaking provided it was not excessive

Analysis and practical advice

– the meaning of “ordinary and proper course of business” will depend on the particular facts of a case. However, in determining what will/will not fall within the definition, the court will likely have regard to the following considerations: 

– whether an objective observer, with knowledge of the relevant company, its articles of association and business, and the context in which the payment will take place, would consider the payment as being in the ordinary and proper course of business

– whether, on the proper interpretation of the order or undertaking containing the form of words, the parties nonetheless did not intend that the proposed payment should be regarded as being in the ordinary and proper course of business

– that the fact that the proposed expenditure is unprecedented or exceptional does not of itself preclude it from being regarded as being in the ordinary and proper course of business (although transactions which are intended to bring to an end, or have the effect of bringing to an end, the company’s business would not be within the definition)

– if the proposed expenditure would give rise to a breach of fiduciary duty, that may properly lend support to the conclusion that the expenditure is not in the ordinary and proper course of business 

– in the particular context of freezing orders, the court will also be concerned to ensure that the order does not operate oppressively, and that the defendant will not be hampered in his ordinary business dealings more than is absolutely necessary to protect the claimant from the risk of improper dissipation of assets. Therefore, in interpreting the words “ordinary and proper course of business”, the court will not usually consider whether the payment or business venture to which it relates is reasonable. Nor will it balance the defendant’s case that it should be permitted to spend such monies against the strength of the claimant’s case. Further, because the claimant is not a secured creditor, and has no proprietary claim to the assets subject to the order, there can be no objection in principle to the defendant dealing in the ordinary way with his business and his other creditors, even if the effect of such dealings is to render the order of no practical value

– from a practical perspective, given the highly fact sensitive nature of whether expenditure falls within the ordinary and proper course of business, the safest course for financial institutions notified of freezing orders as third parties will remain to require the consent of the applicant’s solicitors before allowing any transfers

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