What constitutes the “ordinary and proper course of business”?
Contractual interpretation - Koza Ltd and another v Akçil and others  EWHC 2889 (Ch)
The wider proceedings concern a dispute between rival parties over the management and control of Koza Limited. Under Turkish criminal proceedings, trustees were appointed to manage the company until further investigations had been completed.
In July 2016, there was concern that Koza would dissipate its assets. Koza provided an undertaking that it would only make payments “bona fide in the ordinary and proper course of its business (whether that be existing or new projects)”.
In December 2016. the Court was asked to decide whether Koza was able to incur certain expenditure, on the basis that it fell within the remit of “ordinary course of business” and if it did not whether the Order should be varied to permit it.
The Judge allowed two items to be permitted within Koza Limited’s ordinary and proper course of business, namely a payment to public relations advisers and remuneration to its CEO (up to a specified limit).
The Judge refused to allow payments to fund a proposed ICSID arbitration brought by a company that had become the parent company of Koza pursuant to an SPA. Although this could be of benefit to Koza (so the expenditure could be said to be in the “ordinary course of business”), there were concerns about the authenticity of the SPA, which meant that the payment may not have been made in good faith.
The Court suggested that the following factors be considered:
- Would an objective observer, with knowledge of Koza, view the proposed expenditure as being made in the ordinary and proper course of its business?
- On a proper interpretation of Koza’s undertaking, was the parties’ intention that the proposed expenditure would be regarded as in the ordinary and proper course of business? 8 ADVISORY | DISPUTES | TRANSACTIONS
- Subject to the above points, the fact that the expenditure was unprecedented or exceptional expenditure did not preclude it from being in the ordinary and proper course of business
- If the expenditure would be a breach of directors’ duties then it may fall outside the ordinary and proper course.
Why is this important?
Although the Court has considered this in the context of a freezing injunction, the decision provides useful guidance as to the Court’s approach to determining what amounts to the “ordinary and proper course of business”. In particular, note that the Court considered that unprecedented or exceptional expenditure may still fall within “ordinary and proper course of business”.
Any practical tips?As with other general provisions (eg “reasonable endeavours”), if there are any particular matters that you want to be included or excluded from “ordinary course of business” these should be specified for certainty.