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25 June 2019
The cost of pursuing related arbitration proceedings and fighting extradition proceedings could be costs incurred in the 'ordinary and proper course of business' according to the Court of Appeal in Koza Ltd v Koza Altin.(1)
The parties are in dispute over the control of the first claimant Koza Ltd. In 2015 the directors of various related companies within the Koza group, including Kozin Altin (the first defendant and Koza Ltd's parent), were replaced by trustees appointed by the Turkish state. Koza Ltd and Mr Ipek (one of Koza Ltd's directors) applied for declarations that the notices served by Koza Altin under the Companies Act 2006 to convene a meeting of Koza Ltd to pass resolutions replacing the directors were ineffective. They also applied for an injunction to restrain the defendants from holding any meetings of Koza Ltd, pursuant to the notices. The injunction was granted subject to Koza Ltd providing an undertaking to the court not to "dispose of, deal with or diminish the value of any funds belonging to [it] or held to [its] order other than in the ordinary and proper course of its business".
Koza Ltd intended the following expenditure:
Koza Ltd argued that the expenditure would be in the ordinary and proper course of its business and therefore permitted by the undertaking because:
At first instance, the court held that the proposed expenditure was not permitted and made negative declarations to that effect, primarily on the basis that:
The Court of Appeal summarised the authorities relating to the meaning of an 'ordinary' and 'proper' course of business (mostly in the context of freezing injunctions). The relevant guidance is:
The Court of Appeal discharged the negative declaration but declined to make the positive declaration sought by Koza Ltd. It held that:
If Koza Ltd incurred the expenditure it would therefore do so at its own risk (ie, it would ultimately be shown to be in breach of its undertaking).
The Court of Appeal granted a declaration that the extradition expenditure would be in the ordinary and proper course of Koza Ltd's business:
Many practitioners will be familiar with the 'ordinary and proper course of business' exception from the standard form freezing order. This guidance provides a further, useful example of the application of that difficult test. Its application by the Court of Appeal to the extradition expenditure is perhaps more permissive than might be expected, given the court's recognition that this expenditure was potentially uncommercial. This demonstrates that, consistent with the fact that the purpose of a freezing order should not be to stifle the respondent's business, the court will be slow to substitute its decision making about transactions for that of the respondent.
In terms of the arbitration expenditure, the decision illustrates that where the proposed expenditure or transaction is complex the court may not be in a position to make the factual findings necessary for it to authorise the expenditure in advance, meaning that if the respondent wishes to proceed it must do so at a risk of breaching the order (and, typically, in contempt of court as a result). While the outcome in the present case seems fair (given that Koza Ltd or the Ipek family would presumably know whether the share purchase agreement had been a forgery), in other cases respondents (and their advisers) will inevitably be left in a difficult position.
For further information on this topic please contact Simon Hart or Daniel Hemming at RPC by telephone (+44 20 3060 6000) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
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