Michael Wilson & Partners, Ltd v Emmott

The exception permitting dealings in the ordinary and proper course of business contains separate, cumulative requirements. Both are highly fact-sensitive. The ordinary course concerns the course of the defendant’s business, rather than whether a particular transaction is routine or recurring.

Payment in good faith of a genuine pre-existing liability as it falls due may fall within the exception. The court should consider the nature and purpose of the obligation, the way the business is conducted, its location and the surrounding payment history. The amount and infrequency of a payment are relevant but are not necessarily decisive, particularly where payment is obligatory. A connection between debtor and creditor does not automatically exclude the exception.

Michael Wilson & Partners Ltd operated a legal and business consultancy principally in Kazakhstan. A freezing order granted in aid of an arbitral award permitted it to deal with assets in the ordinary and proper course of business. After receiving settlement proceeds, it paid about US$1.86 million towards a genuine secured loan from Kazholdings Inc and about US$1.23 million in accrued rent to a subsidiary of that company.

Andrew Smith J held on 17 July 2015 that both payments breached the order. On 10 August 2015 he fined the company and committed its sole director, Michael Wilson, to prison for eight months concurrently in respect of each payment. The company and Mr Wilson appealed. The central issue was whether the two payments fell within the ordinary and proper course of business exception.

1. The appeals were allowed. The judge’s decisions that both payments breached the freezing order were set aside. Lewison LJ gave the leading judgment. Gloster and Black LJJ agreed.

2. On a committal application, the applicant bears the burden of proving to the criminal standard that a disputed transaction falls outside the exception. The judge had applied that burden and standard. He proceeded on the basis that the secured loan was genuine and made no finding that the rent was inflated.

3. The words “ordinary and proper course of business” impose separate and cumulative requirements. Their application is highly fact-sensitive and depends on the nature, manner and location of the defendant’s business. Whether a payment is proper is likely to depend on its purpose. A payment made in good faith to discharge a genuine pre-existing business liability will ordinarily satisfy that requirement.

4. The ordinary-course inquiry concerns the course of business, rather than whether the individual transaction is routine or recurring. The exception should not be confined by substitutes such as “routine”, “recurring” or payment of “trade creditors”. A non-dissipatory transaction does not necessarily fall within the exception, because transactions outside it may instead require the claimant’s or court’s approval.

5. The judge took too narrow a view of the secured-loan repayment. The liability long pre-dated the order and became payable on written demand. The payment represented less than one tenth of the outstanding balance, and the security covered present and future receivables. Its obligatory character and the nature of the debt carried greater weight than its amount or the interval since the previous repayment. The association between the entities did not alter the conclusion in light of the accepted evidence about usual financing arrangements in Kazakhstan.

6. The judge also took too narrow a view of the rent payment. The rent was a genuine, monthly liability predating the award. The company had made regular payments on account while lacking funds to discharge it fully, and paid the accumulated arrears once settlement proceeds became available. The size of the payment and the accounting treatment of the arrears did not take it outside the ordinary course.

7. The decision did not establish that repayment of indebtedness to an associated company will always fall within the exception. The inquiry remains dependent on the particular facts. Other argued issues did not arise for decision.

1. Court of Appeal (Civil Division): The company’s and director’s appeals were allowed. The findings that the payments breached the freezing order were set aside: [2015] EWCA Civ 1028.

2. High Court, Commercial Court: Andrew Smith J held on 17 July 2015 that the two payments were outside the ordinary and proper course of business exception. On 10 August 2015 he imposed a substantial fine on the company and committed the director to prison for concurrent terms of eight months.

3. Earlier order: On 5 December 2014 HHJ Mackie QC granted the freezing injunction in aid of an arbitral award.