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High Court clarifies the meaning of the “ordinary and proper course of business” exception in a freezing order in relation to non-trading companies

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

21-09-2018

 

PJSC Commercial Bank Privatbank v Kolomoisky [2018] EWHC 1910 (Ch)

 

Facts of the case

– In December 2017, a freezing order (“FO”) was obtained against the respondent (“Mr K”) along with a number of other parties (see page 14 of the June 2018 edition of ESCOU for our briefing).

– The FO contained specific restrictions on dealings with the assets and businesses of companies directly or indirectly owned or controlled by Mr K. It also contained the usual exception for dealings “in the ordinary and proper course of business”, as long as, in the case of non-trading companies, these were notified in advance to the applicant (“PJSC”).

– Certain payments were later notified and made by non-trading companies owned and/or controlled by Mr K.

– After transactions totalling more than USD40 million had been notified, PJSC applied for a declaration that the payments were prohibited under the FO without further permission or agreement. Mr Kargued that the payments had been made in the ordinary and proper course of business and were therefore permitted.

The decision

– Fancourt J granted the application in part. In his judgment, he considered the meaning of “business”in the FO and held that this was clearly not confined to just a trade or commercial undertaking.

– The judge noted that the FO expressly provided that no notification to PJSC would be required “in relation to dealings or disposals in the ordinary and proper course of business of any trading company”. He considered that because the FO made a specific “differential” provision for non-trading companies, it envisaged that Mr K may own and control companies “which are in principle capable of having an ordinary course of business even though they do not trade for profit.”

– The key was that a non-trading company must have some commercial activity, rather than merely corporate or regulatory arrangements necessary to keep the company in existence to hold assets. Furthermore, there must be a “course” of commercial activity in order that a transaction could be said to be in the ordinary course of business.

Analysis and practical advice

– Although the decision in this case was necessarily fact-sensitive, and is under appeal at the time of publication, the judgment includes a helpful re-statement of the purpose of the “proper and ordinary course of business” exception, namely that “a respondent is not to be prevented, ahead of trial, from properly carrying on its business in the way that it did before, even if that involves disposing of assets.”

– Beyond the broad principles identified in this and similar cases, it will be a question of fact and degree whether what is done (or to be done) amounts to an activity in the ordinary and proper course of business. For example, a payment which is in the ordinary and proper course of one business may not satisfy that description in the case of another business, or even the same business operating in a different location. As regards individuals, it will also be necessary to show that the activity constitutes a business in the first instance. For example, changes by an individual to his investments are unlikely to fall within the definition, unless the investor is himself running a business by making the changes, rather than simply re-organising his investments to obtain a better outcome.

– Accordingly, third party financial institutions would remain advised to continue to take a cautious approach and, where necessary, to seek clarification or guidance from the Court.