When only “ordinary” and “proper” will do

15 July 2019

The Court of Appeal examines the use which may be made of company funds which are subject to undertakings or freezing orders allowing only expenditure “in the ordinary and proper course of business”.

The Court of Appeal’s recent decision in Koza Ltd & Anor v Akcil & Ors[1] provides useful guidance on the meaning and interpretation of a company’s undertaking not to dispose of funds other than “in the ordinary and proper course of its business”.

 The company, Koza Ltd, sought permission for two types of expenditure which it wished to incur without breaching its undertaking:

  1. £1.5 million to fund arbitration proceedings to be brought by the ultimate holding company of its group of companies; and
  2. £75,000 to pay its sole director’s legal costs in defending extradition proceedings.

The Court of Appeal considered the case law on what constitutes an “ordinary and proper course of business”, most of which arises in relation to freezing orders containing the same wording, and summarised the following principles:

  1. Whether a transaction is carried out in the ordinary and proper course of a company’s business is a mixed question of fact and law – the specific factual context will need to be considered;
  2. The focus is not on the transaction itself, but on the course of business of which it forms part;
  3. The company must show that the course of business is both “ordinary” and “proper”; and
  4. This must be considered in light of accepted commercial standards and practices.

The Court of Appeal overturned the first instance negative declaration that the arbitration expenses were not within the ordinary and proper course of Koza’s business, finding that although this type of expenditure was not customary for the company and although it could be said to benefit the holding company bringing the arbitration rather than Koza itself, if the arbitration succeeded it would benefit Koza’s core business by unlocking access to funding from its corporate group. In the particular circumstances, however, the arbitration proceedings related to a Share Purchase Agreement the authenticity of which was in doubt, and the Court of Appeal was therefore not prepared to positively endorse this expenditure.

In relation to Koza Ltd’s director’s extradition defence costs, the Court of Appeal decided that in the circumstances the director was a vital asset to the company. Preventing him from being extradited in order to retain his services as the company’s director served to protect its ongoing business and was therefore a transaction in the ordinary and proper course of its business, even though the director may have been in a position to fund those defence costs himself.

This Court of Appeal decision is important for litigants dealing with undertakings or freezing orders containing the “ordinary and proper course of business” wording who may find that the requirement is not as stringent as they may have assumed.

[1] [2019] EWCA Civ 891