Court of Appeal considers whether "ordinary and proper course of business" undertaking prevents financing ICSID case and funding extradition defence of company director

The Court of Appeal has overturned two High Court orders that a mining company's proposed payments to fund litigation by related parties were not permitted under the company's undertaking not to dispose of or deal with its funds "other than in the ordinary and proper course of its business": Koza Ltd v Akcil & Ors [2019] EWCA Civ 891.

The decision offers helpful guidance as to how courts should interpret "ordinary and proper course of business" undertakings given by a company. The Court of Appeal adopted a pragmatic approach, which emphasises the importance of whether the activity for which the relevant payments are being made can be said to support the company’s core business. The Court of Appeal's decision in this case did not relate to a freezing injunction, but will clearly be relevant to similar carve-outs which are usually included in freezing injunctions.

Kevin Kilgour, a Senior Associate in our disputes team, considers the decision further below.

Background

Mr Ipek, one of the appellants, was a director of Koza Ltd (a mining company) and a member of the Ipek family, which owns the corporate group to which Koza Ltd belongs ("the Koza Group”). Koza Altin, one of the respondents, also belongs to the Koza Group and Koza Ltd is its wholly owned subsidiary.

The parties were engaged in a "hard-fought" dispute over control and management of Koza Ltd. As part of what the claimants alleged was a politically-motivated effort by the Turkish authorities to take control of the Koza Group, the Turkish courts had made an order replacing the directors of certain Koza Group companies with trustees.

In 2016, Koza Altin purported to serve notices under the Companies Act requisitioning a general meeting of Koza Ltd to pass resolutions replacing its directors with the trustees appointed by the Turkish court. The claimants commenced proceedings seeking declarations that the notices were ineffective and an injunction restraining the defendants from holding any meeting of Koza Ltd pursuant to the notices.

Asplin J granted the injunction, pending resolution of the case, subject to an undertaking by Koza Ltd not to dispose of the company’s funds “other than in the ordinary and proper course of its business." The undertaking also included language confirming that it did not prohibit Koza Ltd from spending a “reasonable sum on legal advice… and representation for the Company's benefit".

The ICSID funding appeal

First instance decision

Koza Ltd applied in June 2017 for an order approving the expenditure of up to £1.5 million over an 18 month period and £1.5 million to be held on account against an adverse costs order, to enable an International Centre for the Settlement of Investment Disputes ("ICSID") arbitration to be pursued by Ipek Investment Limited ("IIL") against the Republic of Turkey under the UK-Turkey Bilateral Investment Treaty (“BIT”). IIL is a company incorporated in England and Wales which Koza Ltd claimed to have become the ultimate holding company of the whole Koza Group pursuant to a share purchase agreement ("SPA") which was alleged to have been entered into with the Ipek family.

Koza Ltd argued that the ICSID proceedings would be beneficial to the company by establishing that the wider Koza Group had been the victim of a politically motivated takeover and improve Koza Ltd's ability to regain access to sources of funding from the Koza Group which it had previously enjoyed.

At first instance, Mr Richard Spearman QC (sitting as a deputy judge) accepted that winning the ICSID arbitration would be of substantial commercial benefit to Koza Ltd but dismissed the application for three key reasons. First, after conducting a "detailed analysis" of the jurisdiction of an ICSID tribunal, he concluded that the SPA did not give rise to a qualifying investment under the ICSID Convention and the relevant BIT. Second, the deputy judge found there were good grounds to doubt the authenticity of the SPA and to believe it may be a forged document. Third, he was not satisfied that there were no alternative sources of funding available to IIL.

Court of Appeal decision  

The Court of Appeal (Lord Justice Floyd giving the main judgment) allowed the ICSID funding appeal to the extent that it discharged the deputy judge's negative declaration.

The court drew the following propositions from the authorities:

1. i) The question of whether a transaction is in the ordinary and proper course of a company’s business is a mixed question of fact and law;
2. ii) “Ordinary” and “proper” are separate, cumulative requirements;

iii) The test is an objective one, making it necessary to consider the question against accepted commercial standards and practices for the running of a business;

1. iv) The question is not whether the transaction is ordinary or proper, but whether it is carried out in the ordinary and proper course of the company’s business;
2. v) The questions are to be answered in the specific factual context in which they arise.

The court considered that there were three potential options open to the deputy judge. First, he could have issued a positive declaration that the ICSID expenditure was within the ordinary and proper course of Koza Ltd's business. Second, he could have granted a negative declaration that the expenditure was not permitted. Third, he could have refused to make a declaration either way.

The court considered that the deputy judge was "plainly correct" to find that the authenticity of the SPA was open to very serious doubt. This precluded him from making a positive declaration as the court could not positively declare that an act was in the ordinary and proper course of business, if it may well later turn out to be fraudulent. However, the authenticity issue also could not form the basis of a negative declaration as neither the deputy judge nor the Court of Appeal were in a position to make findings of such seriousness on the basis of written evidence.

Having considered the other reasons given, the court concluded that the deputy judge erred by attempting to resolve the issue of the jurisdiction of the ICSID tribunal. He should have gone no further into the merits than was required to satisfy himself that IIL had a case which Koza Ltd's board could properly support in "good faith".

This though did not dispose of the issue, as it does not follow "from the fact that a particular activity will benefit the company that it will be in the ordinary course of the company's business". The court went on to conclude that, although funding an arbitration could be described as “exceptional expenditure”, in this case it was expenditure targeted at protecting Koza Ltd's "core business”. The key question was whether "the fact that the arbitration is being prosecuted by IIL rather than Koza Ltd takes the funding of it outside the ordinary and proper course of Koza Ltd's business”. Ultimately, the court decided Koza Ltd was not acting as a litigation funder but providing funds because doing so would "facilitate the continuation of the ordinary and proper course of its mining business".

Finally, the court considered whether the availability of alternative funding was a relevant factor. It was "reluctant to lay down any rigid rule" and thought its relevance depended upon the particular facts of a case. It decided that, in this case, it was not a factor which "carries much if any weight", as it was entirely reasonable for Koza Ltd to decide to fund the litigation itself, rather than call upon IIL to resort to other sources of funding.

The court noted that, had the SPA been shown to be genuine, it would have concluded that the ICSID expenditure was within the ordinary and proper course of Koza Ltd's business. As the authenticity of the SPA remained in doubt, however, it only allowed the appeal to the extent of discharging the negative declaration.

Extradition expenses appeal

First Instance Decision

Mr Ipek was arrested in May 2018 in the UK and faced extradition to Turkey pursuant to a request issued by the High Criminal Court of Turkey for offences including "attempting to abolish the government" and attempting to "violate the Constitution" of Turkey, both offences which attracted the penalty of life long imprisonment.

Following an application by Koza Ltd, the defendants requested a declaration that payment to Mr Ipek's solicitor to conduct the extradition proceedings was prohibited under the terms of Asplin J's order. Morgan J granted declarations that payments to the solicitors would not be in the ordinary and proper course of Koza Ltd's business or constitute payments that properly relate to legal advice and representation for Koza Ltd's benefit.

The judge also explained that Mr Ipek's ability to pay his own legal fees was relevant and held that, as Mr Ipek could use his own money to fund his defence, it would not be a "proper" use of the Company's money to fund that defence.

Court of Appeal decision

The Court of Appeal began by stating that the phrase “proper course of business” meant that "the course of business must be in accordance with acceptable standards of commercial behaviour in conducting that business". Consequently, whilst the court said that it might be described as "uncommercial" or "imprudent" for a company to pay for something which its director would pay for anyway, deciding to pay those expenses in those circumstances "is not necessarily outside the proper course of its business." Mr Ipek was a “vital asset” to Koza Ltd and the company was entitled to view paying his defence fees as in the company’s interest.

The court next considered the question of whether the language of the undertaking, which provided that expenditure would be permitted if it related "to legal advice and representation for the Company's benefit" only permitted payments for the legal representation of Koza Ltd itself and cannot extend to other legal advice taken for Koza Ltd's benefit. The respondent submitted that the words "for the Company's benefit" were not included in the standard form of wording of an undertaking in a freezing order and so indicated that they were purposefully included to limit the scope of the exception. The Court of Appeal however disagreed and concluded that "the only requirement for the payments to be permitted is that the legal advice and representation should be of benefit to Koza Ltd". In this case, the Court of Appeal found that they were and allowed Koza Ltd's appeal.

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