Koza Ltd & Anor v Akçil & Ors

This was an application by Koza Limited to construe and, if necessary, vary an undertaking given in an earlier order that it "will not dispose of, deal with or diminish the value of any funds belonging to [it] or held to [its] order other than in the ordinary and proper course of business". The court applied principles drawn from authorities on the meaning of "ordinary and proper course of business" in the context of freezing undertakings and floating charges, and the principles governing variation of voluntarily given undertakings (requiring good or special grounds and attention to overall justice).

The application sought permission for three classes of expenditure: (1) up to £3m to enable a related company to pursue an ICSID arbitration (dismissed) because (a) on the material before the court the SPA said to give ICSID jurisdiction was open to serious doubt, (b) the SPA would not, on proper analysis, create a qualifying investment for ICSID protection, (c) Koza Limited had not shown there were no alternative funding sources, and (d) the balance of justice did not favour release from the undertaking; (2) retainer of PR advisers up to a capped monthly sum (allowed) as being within the ordinary and proper course of business provided expenditure is genuinely for company benefit and made in good faith; and (3) payment of a CEO consultancy fee to Mr Ipek (allowed in part) but reduced by the court from the proposed £650,000 to £250,000 per annum as excessive in the circumstances and potentially problematic as agreed between a company and its controlling director.

Background and parties: Koza Limited (claimant/applicant) is an English subsidiary of a Turkish corporate group. Following Turkish criminal and administrative measures in 2015–2016 the defendants (including persons appointed as trustees and the group parent Koza Altin) purported to requisition meetings to replace directors of Koza Limited. Koza Limited commenced proceedings in England and, by consent, gave an undertaking in an order of 21 December 2016 that it would not dispose of or diminish its funds "other than in the ordinary and proper course of business". The present first-instance application under paragraph 2 of that order sought declarations and/or variation of the undertaking to permit three classes of expenditure.

Nature of the application and relief sought: Koza Limited sought declarations that specified classes of expenditure fell within the undertaking, alternatively an order varying the undertaking to permit (a) funding of an ICSID arbitration to be pursued by Ipek Investment Limited (IIL) (up to £3m), (b) a PR retainer (up to £30,000 per month), and (c) payment of £650,000 p.a. (via a consultancy vehicle) to Mr Ipek as CEO.

Issues framed by the court: The principal issues were (i) the proper interpretation of "in the ordinary and proper course of business" in the undertaking (analysed by reference to authorities on freezing injunctions and floating charges), (ii) whether the asserted ICSID route was bona fide and whether the SPA constituted a qualifying investment for ICSID jurisdiction, (iii) assessment of whether the proposed expenditures would be for the benefit of Koza Limited and made in good faith, and (iv) whether there were "good" or "special" grounds to vary the undertaking.

Reasoning and subsidiary findings: The judge surveyed authorities on freezing orders and on what constitutes ordinary business (including Countrywide Banking v Dean, James cases on Mareva regimes, and other English, Australian and New Zealand authorities) and held the correct approach involved an objective assessment whether an informed observer would view the expenditure as in the ordinary and proper course of Koza Limited's business, together with consideration of good faith and possible fiduciary duty issues. On the ICSID funding the judge found (i) serious doubts as to the authenticity and provenance of the SPA relied upon to establish IIL's investment and jurisdictional basis, (ii) even if genuine the SPA did not, on analysis, give rise to a qualifying investment for ICSID protection because it amounted to an internal share reorganisation without a commitment of new resources into Turkey, (iii) Koza Limited had not shown it had no other sources of funding or that litigation funding had been explored, and (iv) no sufficient change of circumstances or justice-based reason existed to vary the undertaking. The application for ICSID funding was dismissed. The PR retainer was held to be within the ordinary and proper course of the company's business in the circumstances and was permitted, subject to continuing compliance with the undertaking. The proposed CEO remuneration was recognised as a legitimate category of expenditure but the proposed level (£650,000) was judged excessive on the evidence; after assessment the court authorised payment of up to £250,000 p.a. and expressed concern about the proposed payment vehicle and the need for proper tax and contractual arrangements.

Procedural posture: The judge heard the application at first instance and made the rulings summarised above. The judgment records earlier interlocutory relief obtained from Snowden J, a subsequent order by Asplin J embodying the parties' agreement, and an appeal to the Court of Appeal on jurisdiction which was dismissed ([2017] EWCA Civ 1609); the Court of Appeal result did not alter the present rulings but informed factual exposition.

The application was allowed in part and dismissed in part. The court dismissed the application to permit Koza Limited to fund the proposed ICSID arbitration because (a) the SPA underpinning the claim was open to serious doubt and did not on analysis create a qualifying ICSID investment, (b) Koza Limited had not shown no alternative funding sources or that good grounds existed to vary its undertaking, and (c) on overall justice the undertaking should not be varied. The court allowed Koza Limited to retain PR consultants within reasonable bounds as an expense in the ordinary and proper course of business, subject to good faith and compliance with the undertaking. The court allowed payment to the CEO (or via a consultancy vehicle) but capped permissible remuneration at £250,000 per annum, concluding the proposed £650,000 was excessive and that the mode of payment raised issues.

Earlier interlocutory relief was granted on 16 August 2016 by Snowden J and the consented interim regime was incorporated into an order made by Asplin J on 21 December 2016. Koza Altin pursued a jurisdictional challenge which was heard by the Court of Appeal and dismissed: Koza Ltd & Anor v Akcil & Ors [2017] EWCA Civ 1609. The Court of Appeal affirmed jurisdiction and declined to interfere with Asplin J's procedural decision to stand certain strike-out issues over to trial.