Koza Ltd & Anor v Akcil & Ors

Company funds may be used under an undertaking resembling a freezing-order exemption only where the expenditure is in the ordinary and proper course of the company’s business and properly relates to legal advice or representation for the company’s benefit. “Ordinary” refers to the established course of business rather than an extraordinary departure. “Proper” requires an objective assessment and excludes a substantial payment procured by a director primarily for personal benefit where the director can pay personally. The individual’s available resources are therefore relevant. A company need not fund a director’s personal legal expenses where alternative personal resources are available and the payment would not improve the company’s position.

Koza Ltd and its sole director, Hamdi Akin Ipek, applied in hard-fought control litigation concerning the management of Koza Ltd. The company wished to pay Mr Ipek’s legal expenses in resisting extradition proceedings in Turkey.

An earlier order restrained the defendants from disturbing the company’s management and governance arrangements. The company gave undertakings broadly resembling a freezing order. Those undertakings permitted reasonable expenditure on legal advice and representation if the expenditure properly related to legal advice and representation for the company’s benefit.

The principal issues were whether the proposed payment was in the ordinary and proper course of the company’s business, whether it properly related to the company’s benefit, and whether Mr Ipek’s ability to fund his own defence was relevant.

1. The application was determined against the proposed payment. On the balance of probabilities, Mr Ipek had sufficient personal resources to fund his own defence.

2. The expression “ordinary and proper course of its business” required an objective assessment. “Ordinary” referred to the established course of business rather than a fundamental departure from it. The proposed expenditure was not excluded merely because defending an extradition warrant was unusual.

3. The word “proper” was important. A substantial payment procured by a director for his personal legal expenses was not in the ordinary and proper course of the company’s business where the director could pay those expenses himself. The payment was primarily for the director’s personal benefit and was inconsistent with the proper use of company money. It was also capable of constituting a breach of fiduciary duty.

4. The legal-expenses exemption could extend to legal advice and representation for a person other than the company. The expenditure nevertheless had to properly relate to legal advice and representation for the company’s benefit. That requirement was not satisfied because the company did not need to fund Mr Ipek to retain him in the jurisdiction: he would use his own resources, and the company’s payment would not affect the outcome of the extradition proceedings.

5. The judge further stated that, if the wider freezing-order issue had been directly relevant, he would have applied Tidewater Marine International Inc. v Phoenixtide Offshore Nigeria Limited [2015] EWHC 2748 (Comm), treating alternative sources of funds as material when considering whether frozen money should be used for legal expenses. He declined to rule on wider applications of the phrase “ordinary and proper course of business”.