Summary

The Court of Appeal summarised when expenditure could be said to be in the "ordinary and proper course of business" so as to bring it within the scope of an undertaking not to dispose of company assets save for that purpose. Where a sole director was a vital part of the day-to-day activities of a company, it was within the ordinary and proper course of that company's business to pay his legal expenses in resisting extradition, as it was in the company's interest to retain his services.

Facts

A company appealed against decisions that proposed expenditure fell outside the terms of an undertaking.

A dispute was ongoing over the control of the appellant company, which was incorporated in England, but was part of a Turkish group of companies. The appellant and its sole director (H) obtained an injunction to prevent the respondent from convening a general meeting and replacing H with new directors. The injunction was subject to an undertaking provided by the appellant "not to dispose, deal with or diminish the value of any funds belonging to [the appellant] or held to [its] order other than in the ordinary and proper course of business". The appellant sought approval for two items of expenditure. The first was to fund a related company (L) to pursue arbitration proceedings against Turkey before the International Centre for the Settlement of Investment Disputes (ICSID). The appellant maintained that L had become the overall holding company of the group under a share purchase agreement and the appellant would benefit if the arbitration were successful. The second proposed expenditure related to solicitors' fees for advice and representation on behalf of H in opposing Turkey's request for his extradition. Both items of expenditure were found not to be in the ordinary and proper course of the first appellant's business.

Held

Meaning of "ordinary and proper course of business" - The following propositions applied: (a) the question of whether a transaction was in the ordinary and proper course of a company's business was a mixed question of fact and law; (b) "ordinary" and "proper" were separate, cumulative requirements; (c) the test was an objective one, making it necessary to consider the question against accepted commercial standards and practices for the running of a business; (d) the question was not whether the transaction was ordinary or proper, but whether it was carried out in the ordinary and proper course of the company's business; (e) the questions were to be answered in the specific factual context in which they arose, Countrywide Banking Corp Ltd v Dean (Liquidator of CB Sizzlers Ltd) [1998] A.C. 338, [1997] 11 WLUK 405, Ashborder BV v Green Gas Power Ltd [2004] EWHC 1517 (Ch), [2005] B.C.C. 634, [2004] 6 WLUK 664 and Emmott v Michael Wilson and Partners Ltd [2015] EWCA Civ 1028, [2015] 10 WLUK 318 applied (see paras 22-27 of judgment).

ICSID funding - The judge had had three options: a positive declaration that the funding was in the ordinary and proper course of the appellant's business; a negative declaration that it was not; or refusing a declaration because neither case had been made out. There was a seriously arguable case that the share purchase agreement was a forgery. It had therefore been impossible for the judge to make a positive declaration concerning the ICSID expenditure. However, the authenticity issue could not form the basis of a negative declaration, as the judge was not in a position to make findings of that seriousness on the written evidence. The other grounds for the judge's negative declaration were (a) that the ICSID tribunal did not have jurisdiction, (b) that the expenditure was not in the ordinary course of the appellant's business; (c) the absence of evidence as to alternative sources of funding for the arbitration. The decision to provide funding would be taken before the ICSID tribunal had ruled on its jurisdiction. The matter therefore had to be considered from the perspective of the appellant's board. Unless the arbitration's prospects of success were so manifestly poor that they threw doubt on the board's motives in pursuing it, the prospects did not have any relevance to whether the expenditure was outside the scope of the undertaking. The judge should merely have satisfied himself that L had a case which the appellant's board could properly support in good faith. As to reason (b), exceptional expenditure could be within the ordinary course of business. The appellant's board thought it reasonable to support the arbitration in order to protect the company's core business and its access to funding for larger projects. Further, the fact that the arbitration would be prosecuted by L, rather than the appellant, did not take the funding outside the ordinary and proper course of the appellant's business. There was a rational commercial explanation for proceeding in that way. As to reason (c), the issue of alternative funding in the instant case did not carry much, if any, weight, as it was entirely reasonable for the appellant to decide to fund the arbitration. The negative declaration was therefore overturned, but the court refused to make a positive declaration. If the appellant pursued the arbitration funding, it did so at its own risk that it might be shown to be in breach of its undertaking (paras 30-32, 39-48).

Extradition expenses - The judge had been entitled to find that H could pay for his own defence to the extradition proceedings. However, from the appellant's point of view, H was a vital asset. The fact that he would pay his own expenses if the appellant did not was not a sufficient reason for regarding their payment by the appellant as outside the proper course of its business. The payment would also fall within the exception to the undertaking for "legal advice or representation for the company's benefit". The payments were designed to secure the retention of H's services as a director. The negative declaration was discharged and replaced with a positive declaration that the payment fell within the terms of the undertaking (paras 64-67, 72-76).

Appeal allowed