Koza Ltd & Anor v Akcil & Ors

Whether expenditure is in the ordinary and proper course of a company’s business is an objective, fact-sensitive mixed question of fact and law. “Ordinary” and “proper” are separate and cumulative requirements. The inquiry concerns the course of the company’s business, assessed against accepted commercial standards in its particular circumstances, rather than whether the individual transaction is commonplace.

In deciding whether proposed litigation funding meets that standard, a court should not decide the merits of the proposed claim unless its prospects are so manifestly poor as to cast doubt on the board’s good faith. Alternative funding is not ordinarily a requirement for expenditure within an existing ordinary-course exception, though it may matter on the facts. A company may properly fund legal representation of a key director where it benefits the company, even if the director could pay personally.

Koza Ltd gave undertakings pending a dispute over its control. It could not deal with its funds except in the ordinary and proper course of business. It could also spend a reasonable sum on legal advice and representation where the resulting liabilities properly related to advice and representation for its benefit.

In the first appeal, Mr Richard Spearman QC declared that Koza Ltd could not fund an ICSID arbitration to be brought by Ipek Investment Ltd against Turkey: [2017] EWHC 2889 (Ch). The proposed claim depended on a share purchase agreement whose authenticity was in serious doubt.

In the second appeal, Morgan J declared that Koza Ltd could not pay its director’s legal costs in resisting extradition to Turkey: [2018] EWHC 1612 (Ch). The central issue was whether each proposed payment fell within the undertakings.

1. The court allowed both appeals. It discharged the negative declaration concerning ICSID funding but did not grant a positive declaration. The serious unresolved doubt about the authenticity of the share purchase agreement meant that the court should not authorise the funding prospectively. Koza Ltd could fund the arbitration only at its own risk of later being found in breach of the undertaking.

2. The proposed ICSID funding would, if the agreement were genuine, be within the ordinary and proper course of Koza Ltd’s business. The test is objective and fact-sensitive. “Ordinary” and “proper” are cumulative requirements, assessed by reference to the company’s actual business, accepted commercial standards and the circumstances at the time.

3. The deputy judge erred by deciding the ICSID tribunal’s jurisdiction on the merits. The relevant question was whether Koza Ltd’s board could in good faith support an arguable arbitration. Only prospects that were manifestly poor enough to cast doubt on the board’s motives could matter. Expenditure which was exceptional and funded proceedings brought by another company could nevertheless be in the ordinary course where it was rationally directed to protecting Koza Ltd’s core mining business and its access to funding.

4. The court allowed the extradition-expenses appeal and substituted positive declarations under both paragraphs of the undertaking. Proper business conduct means conduct in accordance with acceptable commercial standards; it does not necessarily exclude expenditure that is unnecessary or which a director could personally afford. “Reasonable sum” concerned the amount of legal fees, not necessity or prudence.

5. The legal-expenses exception extended to legal advice and representation of a person other than Koza Ltd, provided it benefited Koza Ltd. Paying the sole director’s extradition costs was sufficiently connected with retaining his services and protecting the company’s legitimate mining interests. It was therefore in the ordinary and proper course of business and properly related to legal advice and representation for the company’s benefit.

• Court of Appeal (Civil Division): Allowed the two appeals. It discharged the negative declaration in the ICSID funding order and substituted positive declarations in the extradition-expenses order: [2019] EWCA Civ 891.
• High Court, Chancery Division (Mr Richard Spearman QC sitting as a deputy High Court Judge): Declared that the proposed ICSID funding was not in the ordinary and proper course of business: [2017] EWHC 2889 (Ch).
• High Court, Chancery Division (Morgan J): Declared that the proposed extradition payments were neither in the ordinary and proper course of business nor legal expenses properly relating to the company’s benefit: [2018] EWHC 1612 (Ch).