Koza Ltd & Anor v Koza Altin Isletmeleri AS

A company’s funds should not ordinarily be used to finance a dispute between its shareholders where the company is the object of the dispute rather than a genuine independent protagonist. The company may incur expenditure necessary to protect its own interests, such as complying with disclosure obligations, but it must not take sides or fund one shareholder’s position.

Where the principle may apply but the position is not beyond argument, an interim injunction is determined under conventional American Cyanamid principles. An existing interim order regulating expenditure does not authorise otherwise improper payments unless its wording does so clearly. The impecuniosity or unwillingness of one shareholder to fund the dispute does not itself justify company funding.

The defendant, the 100% ordinary shareholder of the claimant company, applied to restrain the second claimant, its controlling director and “A” shareholder, from procuring the company to fund the existing proceedings and proposed new proceedings concerning authority to represent the defendant and control of the company.

The applications arose against an interim regime imposed by Asplin J, which permitted expenditure in the ordinary and proper course of the company’s business and legal expenditure relating to advice and representation for the company’s benefit. The Supreme Court had previously dismissed the authority claim for want of jurisdiction. The central issues were whether the legal costs principle applied, whether the interim order authorised the expenditure, and whether injunctive relief was just and convenient.

1. Legal costs principle. The real contest was between the shareholders over control of the company. The company was the object of the litigation, not a genuine protagonist in its own right. It would therefore be a breach of duty and misfeasance for the director to procure the company to fund the costs of advancing his side of that dispute. The company could incur costs necessary to protect an independent interest, including genuinely independent obligations such as disclosure. [2021] EWHC 786 (Ch) at [64]-[77], [81]-[86], [103]-[114].
2. The question was whether the claim or counterclaim was brought bona fide in the company’s independent interests, or was part and parcel of the shareholders’ dispute. Resolution of the dispute might benefit the company, but that did not justify the company taking sides or providing a fighting fund for one protagonist. [2021] EWHC 786 (Ch) at [76], [98]-[104].
3. The wording of the Asplin order did not modify or disapply the legal costs principle. The carve-out for legal fees in connection with the litigation addressed notification and could extend to the proposed new claim, but did not authorise payments which were otherwise improper. Much clearer words would have been required to achieve that result. [2021] EWHC 786 (Ch) at [105]-[114].
4. Where the application of the principle was not beyond argument, the court applied conventional American Cyanamid principles. Damages would not be adequate because the defendant was the company’s 100% economic shareholder and recovery from the company would substantially be recovery from itself. The balance of prejudice favoured relief, particularly because continued funding would confer a forensic and cash-flow advantage on the controlling shareholder and distort the status quo. [2021] EWHC 786 (Ch) at [71]-[77], [116]-[135].
5. The court was satisfied that there was a serious issue to be tried and that it was just and convenient to restrain the second claimant from causing or procuring the company to expend funds on the legal costs of the proceedings and the New Authority Claim, subject to provision for genuinely independent obligations such as disclosure. The parties were directed initially to attempt to agree the form of order. [2021] EWHC 786 (Ch) at [113]-[114], [136].

Not stated in the judgment as an appeal. The judgment records earlier decisions in the same litigation, including the Supreme Court’s decision in [2019] UKSC 40 and later Court of Appeal decisions, but the present decision was a first-instance determination of interim applications.