Koza Ltd & Anor v Akçil & Ors

The expression “in the ordinary and proper course of business” in a freezing-order undertaking requires a fact-sensitive assessment. The court should consider objectively whether the expenditure falls within the company’s ordinary business and then whether the undertaking, properly construed, excludes it. Exceptional or unprecedented expenditure is not automatically outside the undertaking. Fiduciary concerns, good faith, the company’s separate interests and the overall interests of justice may be relevant.

An undertaking may be varied for good grounds, normally involving changed circumstances or new facts, but the requirement is applied flexibly according to the circumstances. Expenditure may be permitted where it benefits the company, subject to the continuing requirement that payments comply with the undertaking.

Koza Limited applied for declarations that three classes of expenditure were within an undertaking given under an interim order, or alternatively for the undertaking to be varied. The expenditure concerned funding an ICSID arbitration brought by Ipek Investment Limited, retaining public-relations consultants, and remunerating Hamdi Akin Ipek as chief executive.

The defendants argued that the expenditure was outside the ordinary and proper course of Koza Limited’s business and would benefit Mr Ipek or his family rather than the company. The court considered the proper construction of the undertaking, the principles governing variation of undertakings, and whether the proposed ICSID arbitration involved a qualifying investment.

1. Construction of the undertaking. The expression “in the ordinary and proper course of business” was to be assessed by reference to the circumstances of the undertaking. The court should first ask whether an objective observer, knowing the company, its constitution and its business, would regard the expenditure as ordinary and proper. It should then ask whether the proper interpretation of the undertaking nevertheless excludes it. Exceptional or unprecedented expenditure is not automatically excluded. A possible breach of fiduciary duty may support exclusion.
2. Variation. The court had power to vary or discharge the undertaking for good grounds. A material change of circumstances or newly discovered facts would normally be required, but the principle was not rigid. The court had to consider the context and the overall interests of justice.
3. ICSID funding. A successful arbitration could benefit Koza Limited, but the proposed expenditure was not permitted. The share-swap transaction did not introduce new money or value into Turkey and therefore did not constitute an investment for the purposes of the ICSID Convention and the relevant treaty. Serious doubts about the SPA, the absence of satisfactory evidence that alternative funding was unavailable, and the lack of sufficiently changed circumstances also weighed against variation. The application for this expenditure was dismissed.
4. Public-relations consultants. Expenditure on public-relations services could fall within the ordinary and proper course of business where it benefited the company. Expenditure promoting Mr Ipek’s reputation was not necessarily improper if it facilitated the company’s business. The approval did not authorise expenditure outside the undertaking, and Koza Limited had to ensure that payments were made only for the company’s benefit and in the ordinary and proper course of business.
5. Remuneration. Remunerating a chief executive was ordinarily within the company’s business, provided the remuneration was not excessive. The proposed £650,000 annual payment was excessive and the supporting remuneration analysis was unreliable in the unusual circumstances. Expenditure of no more than £250,000 per annum was permitted. The parties were directed to agree an order, with costs and any permission to appeal reserved.

The judgment records that Asplin J had made the underlying order on 21 December 2016. The Court of Appeal later dismissed an appeal concerning jurisdiction: [2017] EWCA Civ 1609. That appeal did not determine the expenditure issues addressed in this judgment.