Koza Ltd v Akcil

This Court of Appeal considered two appeals about whether proposed payments by Koza Ltd fell within an undertaking not to "dispose of, deal with or diminish the value of any funds ... other than in the ordinary and proper course of its business". The issues were whether proposed funding for an ICSID investment-treaty arbitration brought by IIL and proposed payment of legal fees to defend the director, Mr Ipek, against an extradition request were within that undertaking.

The court held that the deputy High Court Judge had been correct to treat the authenticity of a share purchase agreement (SPA) as casting serious doubt on any positive declaration permitting ICSID funding; however the deputy judge ought not to have embarked on or relied upon a detailed merits assessment of ICSID jurisdiction because, absent manifestly hopeless prospects, questions of tribunal jurisdiction and merits are for the company board to weigh in good faith. Because the authenticity of the SPA remained in doubt the court discharged the deputy judge's negative declaration but did not replace it with a positive declaration.

As to the extradition expenses, the court rejected the view that a director's personal ability to fund his own defence is determinative. The court held that payments by Koza Ltd to fund legal advice and representation for Mr Ipek could properly be regarded as "for the Company’s benefit" where they were targeted at retaining a director essential to the company's business, and substituted positive declarations permitting the payments.

Background and parties: Koza Ltd (appellant) is an English-incorporated company within a Turkish corporate group (the Koza Group). The Ipek family (including the second appellant, Mr Hamdi Akin Ipek) were directors/shareholders of the group. Koza Altin (respondent) sought to replace directors and recover funds. Koza Ltd gave undertakings to the English court in December 2016 not to dispose of funds other than in the ordinary and proper course of its business. Two High Court orders declared specified proposed payments to be outside that undertaking: (i) Mr Spearman QC held proposed funding by Koza Ltd of an ICSID arbitration brought by IIL would not be in the ordinary and proper course of business; (ii) Morgan J held proposed payments to fund Mr Ipek's extradition defence would not be in the ordinary and proper course of business and would not properly relate to the company's benefit.

Procedural posture and relief sought: Koza Ltd appealed both declarations. For the ICSID funding the company sought a declaration that the funding fell within the undertaking (and earlier sought variation, but no longer). For the extradition payments the company sought declarations permitting payment to solicitors for Mr Ipek's extradition defence.

Issues framed: (i) Whether expenditure is in the "ordinary" and "proper" course of Koza Ltd's business; (ii) whether the authenticity of the SPA and the ICSID tribunal's likely jurisdiction took the ICSID funding outside that ambit; (iii) the relevance of availability of alternative funding; (iv) whether payments to fund a director's extradition defence can properly be "for the Company's benefit" under the legal-expenses exception.

Court's reasoning:

• The court restated the legal approach: "ordinary" and "proper" are separate, cumulative, objective requirements answered in the specific factual context; the court must assess the transaction against accepted commercial standards.
• ICSID funding: The existence of serious and arguable doubt about the authenticity of the SPA meant the court should not grant a positive declaration that the funding was in the ordinary and proper course. The deputy judge was correct to be sceptical about the SPA's authenticity, but erred in undertaking a detailed merits assessment of ICSID jurisdiction and relying on it to justify a negative declaration: absent manifestly hopeless prospects, merits and jurisdiction are matters the company's board can pursue in good faith. The availability of alternative funding was relevant to a discretionary variation but did not, on the evidence, decisively take the ICSID funding outside the ordinary and proper course.
• Extradition expenses: Morgan J's factual finding that Mr Ipek probably had funds available was not disturbed. However, as a matter of law the director's personal ability to pay is not determinative: a company may properly pay legal costs if they "properly relate to legal advice and representation for the Company's benefit". The payments were directed at retaining a director central to the company's business and thus could properly be made. The court substituted positive declarations permitting the payments.

Outcome: Appeal on the ICSID funding allowed insofar as the negative declaration was discharged (no positive declaration substituted); appeal on extradition expenses allowed and positive declarations substituted permitting the payments.

This was an appellate hearing. The Court of Appeal allowed the appeals in part. It discharged the deputy High Court Judge's negative declaration that ICSID funding was not in the ordinary and proper course of Koza Ltd's business but refused to substitute a positive declaration because serious doubt remained about the authenticity of the SPA; the court emphasised that a merits assessment of ICSID jurisdiction was not appropriate unless prospects were manifestly hopeless. It allowed the appeal from Morgan J and substituted positive declarations that payments to fund Mr Ipek's extradition defence fell within the undertaking, reasoning that such payments could properly relate to legal advice and representation for the company's benefit where intended to retain a director essential to its business.

Appeals from two Chancery Division orders: (i) Mr Richard Spearman QC (order sealed 21 December 2017) ([2017] EWHC 2889 (Ch)) which granted a negative declaration about ICSID funding; (ii) Morgan J (order sealed 21 June 2018) ([2018] EWHC 1612 (Ch)) which granted negative declarations about extradition-related legal payments. The judgment refers to an earlier Court of Appeal decision in the same proceedings, Koza Ltd and another v Akcil and others [2017] EWCA Civ 1609, and notes a pending appeal to the Supreme Court on a jurisdiction issue.